THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 


THE  TRUST  PROBLEM  IN  THE 
UNITED  STATES 


•The^>^o. 

THE  MACMILLAN  COMPANY 

NEW   YORK    •    BOSTON    •    CHICAGO    •    DALLAS 
ATLANTA     •    SAN    FRANCISCO 

MACMILLAN   &   CO.,   Limited 

LONDON  •  BOMBAY  •  CALCUTTA 
MELBOURNE 

THE  MACMILLAN  COMPANY 
OF  CANADA,   Limited 


THE  TRUST  PROBLEM  / 


IN  THE 


UNITED  STATES       ^^ 


BY 


ELIOT  JONES,  Ph.D. 


PROFESSOR    OF    ECONOMICS    IN    STANFORD    UNIVERSITy 

AUTHOR  OF  "  THE  ANTHRACITB  COAL  COMBINATION 

IN  THE  UNITED  STATES  " 


•Nm  fork 
THE  MACMILLAN  COMPANY 

1929 

All  rights  reserved 


r 

197  ^ 


Copyright,  1921, 
By  the   MACMILLAN  COMPANY 


Set  up  and  electrotyped.     Published  December,  igsi 


PRINTED   IN   THE    UNITED   STATES    OF   AMERICA    BY 
THB  BERWICK    &   SMITH  CO. 


I 

'I 


TO  MY  WIFE 


728188 


PREFACE 

This  book  is  a  study  of  the  trust  problem  in  the  United  States. 
It  presents  an  account  of  the  early  devices  employed  to  restrain 
competition,  and  outlines  the  history  and  character  of  the 
modem  trust  movement;  it  describes  a  number  of  representative 
trusts;  it  analyzes  the  reasons  for  the  formation  of  trusts,  and 
their  economic  and  social  consequences;  it  describes  the  trust 
legislation,  the  decisions  of  the  courts  interpreting  it,  and  the 
dissolution  proceedings  brought  under  it;  and,  finally,  it  consid- 
ers (briefly)  remedies. 

The  book  is  not  a  study  of  all  combinations,  but  merely  of 
those  combinations  that  have  (or  had)  monopoUstic  power,  and 
that  are  properly  designated  as  trusts.  It  is  a  study  of  monopo- 
listic aggregations  of  capital  under  unified  management.  It  con- 
tains no  discussion  of  the  experience  of  foreign  countries,  and 
only  a  brief  (incidental)  discussion  of  the  experience  of  our  forty- 
eight  states.  Material  on  these  subjects  was  collected,  but  i3 
omitted  from  the  book  for  want  of  space,  and  because  of  a  con- 
viction that  the  trust  problem  is  a  national  one,  to  be  settled  in 
the  light  of  the  conditions  of  our  particular  national  life.  The 
analysis  of  the  six  representative  trusts  is  not  intended  to  be 
complete;  the  aim  has  been  merely  to  present  the  data  in  suf- 
ficient fullness  to  bring  out  concretely  the  reasons  for  forming 
trusts,  the  sources  of  their  monopoly  power,  their  tactics,  and 
their  economic  consequences.  In  general,  the  history  of  indi- 
vidual trusts  is  not  carried  beyond  the  date  of  the  dissolution 
proceedings  instituted  by  the  Department  of  Justice  of  the 
United  States.  Adequate  reliable  data  for  the  subsequent  history 
of  these  trusts  are  not  available;  and,  inoreover,  the  purpose  is 
not  to  present  a  complete  history  of  the  representative  trusts, 
but  to  explain  the  national  policy  toward  trusts  as  evidenced 
by  our  laws  and  the  manner  of  their  enforcement. 


viii  PREFACE 

The  outstanding  feature  of  the  trust  problem  is  its  complex- 
ity. In  the  preface  to  an  earlier  book — "The  Anthracite  Coal 
Combination  in  the  United  States" — the  author,  after  a  detailed 
study  of  the  facts  connected  with  a  particular  combination,  took 
occasion  to  emphasize  the  complex  character  of  the  trust  ques- 
tion; and  time  has  only  served  to  deepen  this  early  conviction. 
There  is,  so  it  would  appear,  no  one  solution  of  the  problem; 
for  we  are  confronted  by  a  complex  group  of  issues  that  must  be 
dealt  with  collectively  if  any  solution  is  to  be  had.  The  method 
of  approach  to  this  complicated  problem  has  been  that  of  the  sci- 
entific investigator.  The  author  would  be  neither  advocate  nor 
accuser.  We  are,  in  truth,  in  the  grip  of  mighty  forces, — forces 
that  are  modifying  fundamentally  the  world's  organization  of  in- 
dustry; and  he  would  be  rash  indeed  who  would  venture  to  pre- 
dict with  assurance  what  the  immediate  future  holds  in  store 
for  us — whether  regulated  competition,  regulated  monopoly,  or 
public  ownership  in  one  form  or  another.  Or  possibly  even  some 
new  untried  venture  into  hitherto  unexplored  economic  fields. 
The  author  is  therefore  content  to  present  prunarily  a  record 
rather  than  an  argument — or  a  prophecy. 

Grateful  acknowledgments  are  due  to  my  brothers  Grinnell 
and  Percival,  and  to  Messrs.  J.  S.  Davis,  F.  B,  Garver,  C.  A. 
Huston,  H.  L.  Lutz,  William  Notz,  C.  O.  Ruggles,  F.  W.  Taussig, 
A.  C.  Whitaker,  and  M.  S.  Wildman,  all  of  whom  read  portions 
of  the  manuscript.  But  my  deepest  obligation  is  to  my  father, 
Professor  Richard  Jones,  who  despite  the  demands  of  his  own 
rigorous  intellectual  life  has  given  unstintedly  of  time  and 
counsel,  to  the  end  that  I  should,  with  Shakespeare,  try  to 
'find  where  truth  is  hid,'  and  then  take  heed  lest  I  'deliver' 
more  or  less  than  truth. 

E.J. 

Stanford  University 
November,  1920. 


CONTENTS 

CHAPTER  I 

INTRODUCTORY 

PAGE 

Definition  of  trust ^ 

Explanation  of  forms  of  industrial  organization 2 

Small-scale  production 2 

Large-scale  production 3 

Combination 3 

Horizontal 3 

Vertical 3 

Trust 4 

The  problem S 


CHAPTER  II 

POOLS 

Some  early  pools " 

Definition ^ 

Types 7 

Gentlemen's  agreement 7 

Speculative  pool 8 

Regulation  of  the  output 8 

Cotton  bagging 8 

Anthracite  coal 8 

Steel  rail 9 

Wire  nail lo 

Meat-packing lo 

Difficulty  with  this  type  of  pool n 

Division  of  the  field 12 

Addyston  Pipe  and  Steel  Company 12 

Tobacco ^3 

Selling  agency ^3 

Michigan  Salt  Association 14 

Continental  Wall  Paper  Company 14 

ix 


X  CONTENTS 

PAGE 

Patent  pool ^5 

Electric ^5 

Bath  tub IS 

Advantages  and  disadvantages  of  pools i6 

CHAPTER  III 

THE  TRUSTEE   DEVICE 

Standard  Oil  "trust" i9 

American  Cotton  Oil  and  National  Linseed  Oil "  trusts" 20 

Distillers  and  Cattle  Feeders'  "trust" 21 

Sugar  Refineries  Company 21 

National  Lead  and  Cordage  "  trusts" 22 

State  and  federal  legislation 23 

Decision  in  sugar  "  trust "  case 24 

Decision  in  Standard  Oil  "trust"  case 24 

Dissolution  scheme  of  Standard  Oil  Company 25 

CHAPTER  IV 

THE  MODERN  TRUST  MOVEMENT 

New  scheme  to  restrain  competition 27 

Security  holding  company 27 

Property  owning  company 27 

Holding  company 27 

Explanation  of  the  term 27 

Changes  effected 28 

Why  resorted  to? 20 

Why  not  resorted  to  earlier? 29 

Special  cases  of  holding  companies 29 

New  Jersey  legislation 3° 

New  Jersey's  example  followed  by  other  states 31 

American  Cotton  Oil  Company 31 

Property  owning  company 3^ 

Consolidation  or  merger 32 

Purchase  and  sale 34 

Exchange  of  property  for  stock 35 

New  Jersey  legislation 35 

American  Tobacco  Company 36 

American  Sugar  Refining  Company 36 

Relative  merits  of  security  holding  companies  and  property  owning 

companies 37 

Extent  of  trust  movement 38 


CONTENTS  XI 
CHAPTER  V 

THE   STANDARD   OIL  COMPANY 

PAGE 

Early  history 4^ 

Organization  of  Standard  Oil  Company  of  New  Jersey 56 

Proportion  of  output  controlled 5^ 

Sources  of  monopoly  power 60 

Control  of  crude  oil  output 60 

Efficiency ^^ 

Economies  of  trust  form  of  organization 62 

Ownership  of  pipe-lines 66 

Railroad  cUscriminations 72 

Unfair  methods  of  competition  in  selling 77 

Prices ^3 

Profits 87 

CHAPTER  VI 

THE   AMERICAN   SUGAR   REFINING  COMPANY 

History  of  acquisition  of  cane  sugar  companies 92 

Acquisition  of  beet  sugar  interests 102 

Proportion  of  output  controlled 105 

Sources  of  monopoly  power 108 

Economies  of  trust  form  of  organization 108 

Control  of  raw  material no 

Patents i" 

Abuses ^11 

TariflF I" 

Undenveighing "3 

Railroad  rebates "4 

Purchase  of  competitors 115 

Prices "6 

Profits "9 

CHAPTER  VII 

THE   AMERICAN  TOBACCO   COMPANY 

Organization  of  cigarette  trust 123 

Organization  of  plug  tobacco  trust 126 

Organization  of  smoking  tobacco  trust 1 2g 

Organization  of  fine-cut  tobacco  trust 130 

Organization  of  snuS  trust 130 


xii  CONTENTS 

PACK 

Attempt  to  establish  a  cigar  trust 131 

Consolidated  Tobacco  Company 133 

British-American  Tobacco  Company 134 

American  Tobacco  Company  (1904) 136 

Proportion  of  output  controlled 138 

Cigarettes  and  little  cigars 138 

Plug  tobacco 141 

Smoking  tobacco 142 

Fine  cut  tobacco 143 

Snuff 143 

Cigars 143 

Sources  of  monopoly  power 143 

Leaf,  licorice,  etc 143 

Railway  rebates 14S 

Tariff 14S 

Economies 146 

Size  of  plants 146 

Cigarettes 146 

Plug  tobacco 147 

Smoking  tobacco 148 

Snuff 148 

Cigars 148 

Selling  and  advertising  costs 149 

Purchase  of  supplies 1 50 

Patents 150 

Local  price  discrimination — bogus  independents 151 

Jobbing  business 152 

United  Cigar  Stores  Company 153 

Summary — Purchase  of  competitors  real  cause 153 

Prices iS4 

Profits 161 

CHAPTER  VIII 

THE   UNITED  SHOE  MACHINERY  COMPANY 

Organization  of  United  Shoe  Machinery  Company 165 

Proportion  of  industry  controlled 165 

Sources  of  monopoly  power 167 

Original  act  of  combination 167 

Shoe  machinery  leases 171 

Advantages  of  leasing  system 1 74 

Analysis  of  tying  clauses  and  their  effects 174 

Attitude  of  shoe  machinery  manufacturers 176 


CONTENTS  xiii 

PAGE 

Excellence  of  machines  and  service 178 

Effect  of  monopoly  on  inventive  progress 178 

Plant  episode 180 

Royalties 183 

Profits 184 

CHAPTER  IX 

THE  UNITED  STATES   STEEL  CORPORATION 

History  of  iron  and  steel  industry  to  1898 186 

Combination  movement,  1898-1900 189 

Description  of  combinations  of  1898-1900 190 

Explanation  of  the  movement 196 

Organization  of  United  States  Steel  Corporation 200 

Reasons  for  its  formation 200 

Restriction  of  competition 200 

Promoters'  profits 203 

Economies 204 

Importance  of  the  Corporation  in  1901 206 

Extent  of  overcapitalization 207 

Subsequent  additions  to  investment 208 

Profits 210 

Proportion  of  output  controlled 213 

Explanation  of  failure  to  maintain  its  relative  position 218 

Control  of  iron  ore  deposits 222 

Ownership  of  iron  ore  railroads 223 

Cooperation  in  fixing  prices 225 

CHAPTER  X 

THE  INTERNATIONAL  HARVESTER  COMPANY 

Organization  of  International  Harvester  Company 231 

Severity  of  competition 232 

Integration 234 

Development  of  foreign  trade 235 

Promoters'  profits 235 

Absence  of  overcapitalization 236 

Extension  of  its  business 237 

Acquisition  of  competing  concerns 237 

Acquisition  of  noncompeting  lines 238 

Organization  of  International  Harvester  Corporation 239 

Organization  of  International  Harvester  Company  of  America 240 


xiv  CONTENTS 

PAGE 

Proportion  of  output  controlled 242 

Sources  of  monopoly  power 247 

Economical  production 248 

Large  financial  resources 251 

Competitive  practices 251 

Prices 254 

Profits 257 

CHAPTER  XI 

THE  EFFECT  OF  TRUSTS   ON  PRICES 

Introductory 260 

Teaching  of  experience 261 

Oil  trust 261 

Sugar  trust 262 

Steel  trusts 263 

Tobacco  trusts 266 

Harvester  trust 267 

Whisky  trusts 268 

Significance  of  overcapitalization 269 

Steel  trusts 270 

Tobacco  trusts 270 

Miscellaneous  trusts 271 

Significance  of  the  protective  tariff 273 

General  reasoning 2  74 

Law  of  monopoly  price 274 

How  does  monopoly  price  compare  with  competitive  price? 275 

Restraints  on  high  prices  of  trust  controlled  articles 276 

Potential  competition 276 

Substitutes 278 

Balance  of  power  among  trusts 278 

Public  opinion  and  legislation 279 

Sense  of  equity  and  reasonableness 280 

Inert  management 280 

Difficulty  of  determining  most  profitable  price 281 

Conclusion 281 

CHAPTER  XII 

promoters'   profits   in  the   ESTABLISHMENT   OF  TRUSTS 

Function  and  work  of  the  promoter 283 

Profits  realized  by  promoters  of 285 

Iron  and  steel  combinations  and  trusts,  1898-1900 285 


CONTENTS  XV 

PAGE 

United  States  Steel  Corporation,  1901 288 

Tobacco  trusts,  1890-1904 289 

American  Can  Company,  1901 292 

International  Harvester  Company,  1902 293 

Miscellaneous  trusts,  1890-1901 296 

Trusts  in  organization  of  which  promoters'  profits  were  absent 298 

Conclusion 299 

CHAPTER  XIII 

THE   COMMON   LAW   RELATING  TO  COMBINATIONS   AND  TRUSTS 

Introductory 300 

Early  cases 3°° 

Agreements  to  restrict  competition 302. 

Invalid  agreements 302 

India  Bagging  Association  v.  B.  Kock  and  Company 302 

Morris  Run  Coal  Company  v.  Barclay  Coal  Company 303 

The  Central  Ohio  Salt  Company  v.  Guthrie 304 

Raymond  v.  Leavitt 3^4 

De  Witt  Wire-Cloth  Company  v.  New  Jersey  Wire-Cloth 

Company 3°5 

Chapin  v.  Brown  Brothers 30S 

More  V.  Bennett 3°^ 

State  of  New  York  v.  The  Milk  Exchange 306 

Slaughter  v.  Thacker  Coal  and  Coke  Company 3°? 

Valid  agreements 3°^ 

Skrainka  v.  Scharringhausen 3°^ 

Dolph  V.  Troy  Laundry  Machinery  Company 309 

Central  Shade-Roller  Company  v.  Cushman 31° 

Trustee  device  cases 3" 

Mallory  v.  Hanaur  Oil-Works 3^^ 

State  V.  Nebraska  Distilling  Company 312 

State  of  New  York  v.  North  River  Sugar  Refining  Company 313 

State  V.  Standard  Oil  Company 3^4 

Corporate  combination  cases  3^5 

Richardson  v.  Buhl 3^5 

Distilling  and  Cattle  Feeding  Company  v.  People 316 

CHAPTER  XIV 

TRUST  LEGISLATION  TO   I914 

Introductory 3^° 

Sherman  Act  (1890) , 3^9 

Wilson  tariff  Act  (1894) 322 


xvi  CONTENTS 

PAGE 

Discussion  and  agitation  (1895-1903) 323 

Act  to  expedite  trust  cases  (1903) 326 

Act  to  create  Bureau  of  Corporations  (1903) 327 

Further  discussion  of  legislative  policies 328 

Act  to  expedite  trust  cases  amended  (1910) 33° 

Act  to  provide  for  publicity  in  taking  evidence  (1910) 330 

Miscellaneous  legislation 33^ 

CHAPTER  XV 

THE  TRUST  LEGISLATION  OF   1914 

Legislative  history 333 

Introductory 333 

Message  of  the  President 335 

Course  of  the  Trade  Commission  bill  through  Congress 338 

Course  of  the  Clayton  bill  through  Congress 341 

The  Trade  Commission  Act 342 

Organization  of  the  commission 343 

Powers  and  duties 343 

Investigation 344 

Compilation  of  information 344 

Filing  of  annual  and  special  reports  by  corporations 344 

Classification  of  corporations 34^ 

Investigation  of  alleged  violations  of  anti-trust  acts 346 

Recommendations  for  adjustment  of  business  of  corpora- 
tions alleged  to  be  violating  anti-trust  acts 346 

Preparation  of  decrees  in  suits  in  equity 347 

Investigation  of  observance  of  decrees 348 

Investigation  of  trade  conditions  in  foreign  countries.  . . .   349 

Publication  of  information  collected  by  it 349 

Submittal  of  annual  and  special  reports  to  Congress 349 

Recommendations  for  additional  legislation 349 

Prevention  of  unfair  methods  of  competition  in  commerce.. .  .   350 

Miscellaneous  provisions 355 

The  Clayton  Act 357 

Set  of  positive  prohibitions 357 

Local  price  discrimination 35^ 

Tying  contracts 360 

Holding  companies 363 

Interlocking  directorates 3^4 

Remedies 3^6 

Enforcement  through  a  commission 366 

Individual  suits  for  three-fold  damages 3^7 


CONTENTS  xvii 

PAGE 

Suits  brought  by  the  government 360 

Individual  suits  for  injunctive  relief 370 

Labor  provisions 371 

CHAPTER  XVI 

THE   WEBB-POMERENE   ACT 

Conditions  that  gave  rise  to  a  demand  for  such  legislation 374 

Competition  of  combinations  of  foreign  producers 374 

Competition  of  foreign  export  associations 375 

Combinations  of  foreign  buyers 377 

Miscellaneous  obstacles  to  development  of  American  export  trade.  377 

Progress  of  the  bill  through  Congress 378 

Provisions  of  the  act 381 

Possible  objections  to  the  legislation 386 

Restriction  of  competition  in  the  domestic  market 386 

Promotion  of  international  combinations 386 

Extension  of  foreign  combinations 387 

International  friction 387 

CHAPTER  XVII 

JXJDICIAL  INTERPRETATION   OF  THE    SHERMAN   ACT 

U.  S.  V.  E.  C.  Knight  Company 388 

U.  S.  V.  Trans-Missouri  Freight  Association 391 

U.  S.  V.  Joint  Traffic  Association 394 

Addyston  Pipe  and  Steel  Company  d.  U.  S 395 

Bement  v.  National  Harrow  Company 398 

Northern  Securities  Company  t).  U.  S 399 

Swift  and  Company  i».  U.  S 403 

Loewe  v.  Lawlor 405 

Standard  Oil  Company  ^).  U.  S 406 

U.  S.  V.  American  Tobacco  Company 413 

Henry  v.  A.  B.  Dick  Company 419 

U.  S.  V.  St.  Louis  Terminal  Association 422 

Standard  Sanitary  Manufacturing  Company  t).  U.  S 424 

U.  S.  V.  Reading  Company 426 

U.  S.  V.  Patten 429 

U.  S.  z).  Winslow 431 

U.  S.  V.  United  Shoe  Machinery  Company 432 

U.  S.  V.  International  Harvester  Company 435 

U.  S.  V.  Corn  Products  Refining  Company 436 

U.  S.  V.  United  States  Steel  C(Mporation 438 


xviii  CONTENTS 

CHAPTER  XVIII 

TRUST  DISSOLUTION  PROCEEDINGS 

PAGE 

Record  of  the  administrations 441 

Benjamin  Harrison 441 

Grover  Cleveland 442 

William  McKinley 443 

Theodore  Roosevelt 443 

William  Howard  Taft 444 

Woodrow  Wilson 445 

Trust  dissolutions 445 

The  oil  trust 445 

The  plan  of  dissolution 445 

Ineffectiveness  of 447 

Recommendations  of  Federal  Trade  Commission 451 

The  tobacco  trust 452 

Introductory 452 

Provisions  of  the  decree 454 

Defects  of  the  decree 461 

Investigation  of  Federal  Trade  Commission  into  effectiveness 

of  the  dissolution 470 

The  powder  trust 474 

The  shoe  machinery  trust 475 

The  cash  register  trust 477 

The  harvester  trust 479 

The  glucose  trust 484 

The  meat  combination 485 

The  steel  trust 490 

Consent  decrees 490 

The  aluminum  trust 490 

Miscellaneous  concerns 492 

Suits  pending 493 

Explanation  of  comparative  failure  of  trust  dissolution  proceedings 494 

AccompUshments 497 

CHAPTER  XIX 

THE   ANTICIPATED  ECONOMIES   OF  THE  TRUST  FORM   OF  ORGANIZATION — TO 
WHAT  EXTENT  REALIZED 

Introduction 499 

Economies  in  bargaining 500 

Purchase  of  materials  and  supplies 500 

Distributors 503 


CONTENTS  xix 

PAGE 

Labor 504 

Financial  institutions 505 

Railroads 505 

Economies  in  production 506 

Continuous  operation  of  plants 506 

Specialization  of  plants  and  machinery 509 

Specialization  of  ability 510 

Employment  in  each  plant  of  the  best  devices,  including  patents. ...   510 

Competition  between  plants 513 

Utilization  of  by-products 514 

Insurance 515 

Smaller  fixed  charges  per  unit  of  product 515 

Economies  in  selling 517 

Advertising 517 

Traveling  salesmen 520 

Export  trade 522 

Cross  freights 528 

Bad  debts 529 

Smaller  stock  of  goods 530 

Disadvantages  of  the  trust  form  of  organization 530 

Scarcity  of  high  grade  administrative  ability 530 

DiflSculty  of  enlisting  best  services  of  operating  officials 533 

Tendency  of  monopoly  toward  stagnation 534 

Additional  financial  outlays  to  which  trusts  are  subjected 536 

Burden  of  highly  centralized  administrative  machinery 537 

Record  of  trust  failures 538 

Explanation  of  trust  successes 539 

CHAPTER  XX 

REGULATION   OF  PRICES 

Introductory 542 

Meaning  of  the  term  "  fair  price  " 542 

How  determine  a  fair  price 543 

Determination  of  costs  of  production 544 

Uniform  costs 544 

Varying  costs 545 

Separate  price  for  each  producer 545 

Price  adjusted  to  marginal  cost 546 

Treatment  of  joint  costs 547 

Necessity  of  frequent  determination  of  costs 548 

Determination  of  a  fair  rate  of  profit 550 

Determination  of  the  investment 551 


XX  CONTENTS 

PAGE 

Regulation  of  profits  rather  than  prices 552 

Additional  consequences  of  price  fixing  policy 553 

Regulation  of  prices  of  raw  materials 553 

Regulation  of  wages 554 

Regulation  of  dealers'  margins 555 

Government  ownership 556 

Reduced  efficiency 55^ 

Miscellaneous 557 

Extension  of  government  authority 557 

Analogy  of  Interstate  Commerce  Commission 558 

Conclusion 559 

CHAPTER  XXI 

CONCLUSION 

Conclusion 5^2 

Bibliography 567 

Index 5^7 


THE  TRUST  PROBLEM  IN  THE 
UNITED  STATES 


THE  TRUST  PROBLEM  IN  THE 
UNITED  STATES 

CHAPTER  I 

INTRODUCTORY 

The  term  "  trust"  in  everyday  speech  is  quite  loosely  used, and 
it  consequently  conveys  a  different  idea  to  different  people.  It 
is  thus  essential  at  the  outset  to  indicate  clearly  the  sense  in 
which  the  word  is  used  in  this  book. 

The  trust,  as  the  term  is  here  employed,  means  industrial 
monopoly.  It  does  not  include  monopolies  (whether  railroad 
or  other)  in  the  so-called  public  service  industries.  Nor  does  it 
include  pools,  trade  associations,  and  other  organizations  which, 
though  they  may  temporarily  possess  some  power  over  prices,  do 
not  interfere  with  the  substantial  independence  of  the  concerns 
involved.  Yet  neither  is  the  term  limited  to  the  earlier  and 
narrower  concept  of  monopoly  as  an  exclusive  legislative  or 
executive  grant.  A  trust  (industrial  monopoly)  may  be  said  to 
exist  when  a  person,  corporation,  or  combination  owns  or  cont  rols 
enough  of  the  plants  producing  a  certain  article  to  be  able  for  all 
practical  purposes  to  fix  its  price.  Control  over  the  price  is  the 
fundamental  test  of  monopoly;  it  is  its  essential  and  character- 
istic feature.  Just  what  percentage  of  the  busine.ss  must  be 
handled  by  a  trust  in  order  that  it  may  be  able  to  determine 
the  price  of  a  given  article  can  not  be  stated  with  precision,  yet 
it  seems  fairly  certain  that  as  a  general  rule  the  production  of 
from  70  to  80  per  cent  of  the  national  supply,  and  possibly  even 
less,  is  quite  ample  for  price  control.  As  was  said  by  Mr.  H.  O. 
Havemeyer,  long  the  head  of  the  sugar  trust:  "It  goes  without 
saying  that  a  man  who  produces  80  per  cent,  of  an  article  can 
control  the  price  by  not  producing;  the  price  must  advance  if  he 


2  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

does  not  produce;  and  it  must  decline  if  he  does  produce,  if  he 
produces  more  than  the  market  will  take.  "^  The  term  trust  or 
industrial  monopoly,  therefore,  is  not  identical  with  complete 
monopoly;^  for  without  an  exclusive  grant  of  privileges  a  com- 
plete monopoly  is  not  likely  to  exist,  unless  it  be  based  upon  the 
sole  possession  of  a  limited  natural  resource. 

The  concept  of  industrial  monopoly  here  defined  has  been 
clearly  described  by  the  Supreme  Court  of  the  United  States.  In 
National  Cotton  Oil  v.  Texas,  the  Court  said:  "The  idea  of 
monopoly  is  not  now  confined  to  a  grant  of  privileges.  It  is 
understood  to  include  a  'condition  produced  by  the  acts  of  mere 
individuals'.  Its  dominant  thought  now  is,  to  quote  another, 
'the  notion  of  exclusiveness  or  unity';  in  other  words,  the 
suppression  of  competition  by  the  unification  of  interest  or 
management,  or  it  may  be  through  agreement  and  concert  of 
action.^  And  the  purpose  is  so  definitely  the  control  of  prices 
that  monopoly  has  been  defined  to  be  'unified  tactics  with  re- 
gard to  prices.'  It  is  the  power  to  control  prices  which  makes 
the  inducement  of  combinations  and  their  profit."'* 

Just  what  is  meant  in  this  book  by  a  trust  may  be  made 
clearer  perhaps  by  differentiating  it  from  other  forms  of  indus- 
trial organization.  While  there  are  many  types  of  manufactur- 
ing organization,  for  the  purpose  of  clarifying  the  idea  of  the 
trust  we  need  distinguish  but  four:  first,  small-scale  production; 
second,  large-scale  production;  third,  production  by  a  group  of 
plants  united  in  a  combination;  and,  fourth,  production  by  a 
trust. 

In  the  manufacture  of  many  commodities,  as  is  well  known, 
small-scale  operations  still  prevail.     The  following  industries 

iLexow  Report  (New  York),  1897,  p.  iii. 

2  In  Patterson  v.  United  States,  222  Fed.  Rep.  619,  the  Circuit  Court  said: 
"To  monopolize  trade  or  commerce,  or  a  part  thereof,  is  to  exclude  persons 
therefrom.  It  is  not,  however,  to  exclude  all  persons."  Were  all  persons 
to  be  excluded,  the  result  would  be  a  perfect  monopoly,  which  in  experience 
has  arisen  only  from  a  sovereign  grant  (p.  619). 

^The  suppression  of  competition  through  agreement  merely  does  not 
come  within  the  author's  definition  of  a  trust, 

*  197  U.  S.  129. 


INTRODUCTORY  3 

will  serve  as  examples:  cigar,  beet  sugar,  brick,  gunpowder, 
bread,  butter,  cheese,  ice  cream,  and  fruit  and  vegetable  can- 
ning. In  the  manufacture  of  a  large  number  of  other  commod- 
ities, the  size  of  the  plant  unit  has  greatly  increased.  As  exam- 
ples may  be  cited  the  following:  oil,  iron  and  steel,  hard  coal, 
soft  coal,  cane  sugar,  cigarettes,  shoes,  textiles,  automobiles, 
tiarvesters,  cash  registers,  shoe  machinery,  and  meat.  Experi- 
ence has  clearly  proven  that  the  articles  mentioned,  as  well  as 
many  others,  can  be  produced  more  economically  in  large  fact- 
ories than  in  small  ones.  It  should  be  borne  in  mind,  however, 
that  what  is  considered  a  large  factory  in  one  industry  would  be  a 
small  unit  in  another  industry.  A  $6,000,000  cotton  mill,  for 
example,  would  be  regarded  as  a  large  plant,  whereas  a  $6,000,- 
000  steel  mill  would  be  a  small-scale  operation. 

The  combination  frequently  represents  a  third  stage.  A  num- 
ber of  factories,  each  of  which  may  have  already  increased  the 
size  of  its  plant  to  the  most  economical  unit  from  the  standpoint 
of  production,  may  combine  in  order  to  secure  the  economies  of 
large-scale  management,  in  addition  to  the  economies  of  large- 
scale  production.  This  combination  may  be  of  two  sorts.  It 
may  be  a  combination  horizontally  (so  to  speak)  or  a  combin- 
ation vertically.  A  horizontal  combination  is  one  that  brings 
together  under  a  single  management  several  plants  producing  the 
same  article,  as,  for  example,  a  combination  of  fertilizer  plants. 
A  vertical  combination  is  one  that  brings  together  a  number  of 
plants,  each  of  which  concerns  itself  with  a  separate  stage  in  the 
production  of  the  finished  product.  This  is  what  is  known  as 
the  integration  of  industry.  As  an  illustration,  a  combination  of 
a  coal  mine,  an  iron  ore  mine,  a  blast  furnace,  a  steel  mill,  and  a 
steel  rail  mill,  is  a  vertical  combination.  Such  a  combination  has 
its  advantages,  as  it  assures  the  manufacturer  of  steel  rails  an 
ample  supply  of  raw  materials  at  a  reasonable  price.  The  com- 
bination horizontally  also  has  its  advantages,  as,  for  example,  a 
saving  in  freight  rates.  A  company  with  one  plant  at  New  York 
and  another  at  Chicago  can  supply  the  intervening  market  from 
that  plant  which  is  nearest  the  point  of  consumption.  Because 
of  the  obvious  advantages  of  combination  in  certain  lines  of  in- 


4  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

dustry  (of  which  more  later),  this  form  of  organization  has  fre- 
quently been  employed.  The  American  Agricultural  Chemical 
Company  is  an  illustration  of  a  horizontal  combination;  the 
Bethlehem  Steel  Company  an  illustration  of  a  vertical  combina- 
tion. Some  combinations,  both  horizontal  and  vertical,  are 
formed  without  any  thought  of  interfering  substantially  with  the 
operation  of  competitive  forces;  others  are  resorted  to  expressly 
for  that  purpose.  Yet  even  when  the  restriction  of  competition 
is  the  object  of  a  combination,  such  is  not  always  the  result.  The 
early  iron  and  steel  combinations,  for  example,  merely  intensified 
a  competition  that  was  already  quite  active. 

The  fourth  form  of  organization  is  the  trust,  by  which  is  meant 
a  combination  of  a  sufficient  number  of  plants  to  secure  practical 
control  over  the  supply,  and  thus  over  the  price.  ^  Well-known 
trusts  are  the  Standard  Oil  Company,^  the  American  Tobacco 
Company,^  the  United  States  Steel  Corporation,  the  American 
Sugar  Refining  Company,  the  International  Harvester  Company, 
and  the  United  Shoe  Machinery  Company.  Though  trusts  may 
by  definition  originate  through  internal  expansion,  in  fact  they 
have  come  into  being  almost  entirely  through  an  act  of  combina- 
tion. They  are  thus  horizontal  combinations,  yet  of  so  far- 
reaching  a  character  that  they  secure  dominion  over  the  industry. 
Trusts,  morever,  may  be  vertical  combinations.  Thus,  the 
United  States  Steel  Corporation  is  highly  integrated,  as  are  also 
the  International  Harvester  Company,  the  Standard  Oil  Com- 
pany, and  the  American  Tobacco  Company.  Not  all  combina- 
tions, whether  horizontal  or  vertical,  are  trusts,  however;  it  is 
possible  to  effect  combinations,  both  horizontal  and  vertical, 
that  have  no  semblance  of  monopoly  power. 

'  Mr.  Kales,  adopting  the  phraseology  of  the  Department  of  Justice  in  the 
International  Harvester  Company  case  (Brief  for  the  United  States  in 
United  States  v.  International  Harvester  Company,  no.  56,  pp.  34-101), 
says  that  a  combination  to  be  a  trust  must  embrace  units  which  together 
occupy  a  "  preponderant  "  position  in  a  given  industry.  Harvard  Law 
Review,  30,  p.  830. 

2  The  situation  prior  to  the  dissolution  decrees  of  191 1  is  here  in  mind. 
Whether  the  oil  and  tobacco  trusts  were  efifectively  dissolved  or  not  is  con- 
sidered in  ch.  i8. 


INTRODUCTORY  5 

The  question  at  issue,  upon  which  it  is  hoped  this  book  will 
throw  light,  is:  what  public  policy  should  be  adopted  toward 
trusts?  Do  trusts  represent  mainly  an  attempt  to  secure  monop- 
oly profits  by  raising  prices,  and  should  they  therefore  be  pro- 
hibited and  the  endeavor  be  made  to  restore  competitive  condi- 
tions so  far  as  possible?  Or  do  trusts  represent  a  more  efficient 
business  organization,  and  should  they  therefore  be  permitted  to 
exist  subject  to  governmental  regulation  of  their  prices  and  the 
like?  Or,  finally,  is  it  difficult,  if  not  impossible,  to  restore  com- 
petitive conditions  or  to  regulate  satisfactorily  the  prices  of  trust- 
controlled  products,  and  should  therefore  the  monopolized  in- 
dustries be  socialized?  It  is  not  assumed  that  this  book  solves 
these  crucial  problems,  yet  it  is  hoped  that  this  presentation  of 
the  facts  may  contribute  toward  their  solution. 


CHAPTER  II 
POOLS 

Whether  or  no  such  was  the  main  reason  for  their  formation, 
the  trusts  have  in  fact  restrained  or  eliminated  competition  in 
their  field.  Yet  some  time  prior  to  the  modern  trust  movement 
attempts  had  been  made  through  other  agencies  to  restrain  the 
free  play  of  competition.  Some  familiarity  with  these  other 
attempts  is  essential  to  an  understanding  of  the  trust  movement. 

The  pool  was  the  first  and  the  commonest  mode  of  restricting 
competition  between  manufacturers.  A  pool  was  formed  in  the 
brass  industry  as  early  as  1853;  ^  and  one  in  the  cordage  industry 
in  1861.^  Yet  until  after  the  Civil  War  combinations  among 
manufacturers  were  few  in  number  and  narrow  in  scope.  The 
inadequacy  of  transportation  facilities,  and  the  comparatively 
small  capital  investment  per  firm,  prevented  manufacturers  from 
reaching  out  to  any  considerable  extent  into  the  territory  of  their 
potential  rivals;  and  there  was  thus  less  occasion  for  association. 
But  with  the  rapid  growth  of  business  after  the  Civil  War  and 
the  development  of  large-scale  production,  keen  competition 
appeared.  To  check  this  competition  pools  were  formed;  and 
they  have  been  numerous  ever  since.  At  the  present  time  they 
are  probably  more  numerous  and  varied  than  ever  before.  Even 
some  of  the  leading  trusts,  such  as  the  United  States  Steel  Cor- 
poration, have  had  pooling  agreements  with  the  independent 
producers;  and  some  pools  are  international  in  scope. 

The  term  pool  as  here  used  is  a  catch-all  for  the  various  agree- 
ments and  associations  whereby  a  number  of  concerns,  each 
preserving  its  own  organization  and  to  a  large  degree  its  own 
independence,   adopted  provisions  looking  toward   the  main- 

'  Lathrop,  The  Brass  Industry,  p.  121. 

'Dewing,  Corporate  Promotions  and  Reorganizations,  p.  114. 

6 


POOLS  7 

tenance  or  raising  of  the  prices  of  the  articles  produced  by  them 
— the  power  actually  to  fix  prices  may  or  may  not  have  been 
conferred  on  a  governing  body — or  looking  toward  the  depres- 
sion of  the  prices  of  the  materials  and  supplies  required  by  them. 
The  pool  in  the  industrial  world  may  be  compared,  so  far  as  its 
organization  is  concerned,  to  a  League  of  Nations  in  the  political 
world.  The  members  of  the  pool,  like  the  members  of  the  League, 
retain  full  control  over  certain  matters,  but  temporarily  delegate 
certain  powers  to  a  central  organization.  Upon  the  disbanding 
of  the  pool,  as  upon  the  dissolution  of  the  League,  the  members 
resume  complete  control  over  their  affairs. 

Pools  are  of  numerous  kinds,  but  six  leading  types  ^  may  be  dis- 
tinguished: first,  the  gentlemen's  agreement;  second,  the  specula- 
tive pool;  third,  the  regulation  of  the  output  pool;  fourth,  the 
division  of  the  field  pool;  fifth,  the  selling  agency;  and,  sixth,  the 
patent  pool. 

First.  The  gentlemen's  agreement  is  perhaps  the  loosest  form 
of  a  pool."  As  its  name  implies  it  is  simply  an  agreement  between 
gentlemen  looking  toward  the  control  of  prices.  As  the  agree- 
ment is  between  gentlemen,  no  formal  organization  is  created, 
and  no  contracts  or  papers  are  signed.  Under  the  gentlemen's 
agreement  there  is  no  provision  for  the  payment  of  penalties  in 
the  event  of  a  violation  of  the  agreement;  such  is  not  assumed 
to  be  necessary,  since  the  members  are  expected  to  abide  faith- 
fully by  their  informal  promises.  Gentlemen's  agreements  have 
been  very  numerous  in  the  iron  and  steel  industry;  in  fact  at 
some  time  or  other  they  have  been  found  in  every  branch  of  the 
industry.^    They  were  employed  also  on  several  occasions  in  the 

^  No  claim  of  comprehensiveness  or  all-inclusiveness  is  made  for  this  class- 
ification. It  does  not  include,  for  example,  those  wholesalers'  or  retailers' 
associations  which  Mr.  Stevens  calls  legitimate  trader  associations.  See 
American  Economic  Review,  3,  p.  555. 

''■  Some  authors,  for  example,  Mr.  Haney  (Business  Organization  and  Com- 
bination, 1915,  p.  146),  do  not  classify  a  gentlemen's  agreement  as  a  pool. 
This  is  because  they  give  to  the  term  pool  a  narrower  and  more  restricted 
meaning  than  is  employed  in  this  text. 

^  Report  of  the  Commissioner  of  Corporations  on  the  Steel  Industry, 
part  I,  p.  75. 


8  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

anthracite  industry.^  However,  mere  agreements  rarely  proved 
successful,  since  there  was  nearly  always  at  least  one  "black 
sheep"  whose  infractions  of  the  agreement  led  to  its  abandon- 
ment. 

Second.  The  speculative  pool,  being  organized  for  speculative 
purposes,  is  a  temporary  arrangement,  which  is  ordinarily  ter- 
minated as  soon  as  the  object  of  the  pool  has  been  attained.  Per- 
haps the  best  illustration  of  this  type  of  pool  is  the  French 
Copper  Syndicate,  organized  in  October,  1887.  This  syndicate 
entered  into  contracts  with  the  producers  of  copper  in  other 
countries  for  the  purchase,  at  a  figure  somewhat  above  the  mar- 
ket price,  of  all  the  copper  produced  by  them.  The  syndicate 
hoped  to  corner  the  world's  supply  of  copper,  and  at  the  time 
the  contracts  were  entered  into  did  control  from  80  to  85  per  cent 
of  the  total  supply.  The  financing  of  these  purchases  was,  of 
course,  a  difficult  matter,  particularly  since  the  output  of  copper 
greatly  increased  under  the  stimulus  of  abnormally  high  prices. 
Unfortunately  for  the  syndicate  there  occurred  a  run  on  the  bank 
which  was  providing  the  funds,  and  as  a  result  the  syndicate 
speedily  collapsed.  Subsequently  the  price  of  copper  fell  much 
below  what  it  had  been  prior  to  the  formation  of  the  pool.^  Be- 
cause of  the  fact  that  speculative  pools  were  temporary  in  nature 
and  difiicult  to  finance,  they  were  not  satisfactory  to  the  manu- 
facturers seeking  some  device  whereby  they  might  effectively 
throttle  competition. 

Third.  A  common  type  of  pool  is  one  which  endeavors  to 
regulate  the  output,  and  thus  indirectly  to  regulate  prices.  Such 
a  pool  may  take  various  forms.  Power  may  be  given  to  a  central 
committee  to  order  a  curtailment  of  the  output  of  the  individual 
mills,  as  in  the  cotton  bagging  pool  of  1888.^  More  commonly, 
however,  the  members  of  the  pool  through  a  process  of  discussion 
agree  upon  the  total  output  and  upon  the  division  of  this  output 
among  themselves  in  certain  definite  proportions.  This  was  the 
form  of  agreement  for  many  years  in  the  anthracite  coal  industry, 

»  See  Jones,  The  Anthracite  Coal  Combination  in  the  United  States,  ch.  3. 
2  Andrews,  Quarterly  Journal  of  Economics,  3,  pp.  508-516. 
» House  Report  no.  4165,  50th  Cong.,  2nd  Sess.,  p.  144. 


POOLS  9 

although  the  agreement  here  was  between  the  raihoad  companies, 
rather  than  between  the  coal  mining  companies.  Each  railroad 
(all  of  them  were  engaged  in  the  mining  of  coal  either  directly  or 
indirectly)  was  allotted  a  certain  percentage  of  the  total  ship- 
ments of  anthracite  coal,  and  was  expected  to  take  care  that  the 
amount  of  coal  shipped  by  it,  including  that  carried  for  indepen- 
dent coal  mining  concerns,  did  not  exceed  this  percentage. 
Sometimes  penalties  were  imposed  for  the  violation  of  these 
agreements;  at  other  times  not.  When  provision  was  made  for 
penalties,  the  railroads  exceeding  their  allotment  contributed 
to  a  fund,  which  was  distributed  among  the  railroads  that 
had   carried  less  than  their  allotment.^ 

One  of  the  most  important  pools  regulating  output  was  the 
steel  rail  pool,  formed  in  August,  1887.^  The  members  of  this 
pool  produced  more  than  90  per  cent  of  the  country's  out- 
put of  steel  rails.  By  the  agreement  adopted  the  total  out- 
put as  then  agreed  upon  was  divided  among  the  companies 
in  definite  proportions,  and  provision  was  made  for  a  Board  of 
Control,  which,  with  the  written  consent  of  75  per  cent  of  the 
tonnage,  might  increase  the  pool's  output  from  time  to  time. 
The  fixing  of  prices  was  not  provided  for  in  the  memorandum  of 
agreement,  though  an  informal  understanding  was  reached.  This 
pool  was  comparatively  successful.  The  large  capital  necessary 
for  the  manufacture  of  steel  rails  discouraged  new  competition, 
and  the  practice  on  the  part  of  railway  officials  of  buying  the 
necessary  rails  once  a  year  acted  as  a  stabilizing  factor.  Never- 
theless, the  pool  collapsed  in  1893,  because  of  a  disagreement 
over  the  division  of  tonnage,  the  situation  being  aggravated  by 
the  prevailing  industrial  depression,  which  rendered  imperative 
a  reduction  in  the  total  output.  In  1894  the  pool  was  reorganized, 
though  not  without  considerable  difficulty.  The  depressed  state 
of  the  trade  led  to  new  violations  of  the  agreement  in  1896,  and 
in  February  of  the  following  year  the  pool  was  again  broken  up. 

1  Jones,  The  Anthracite  Coal  Combination  in  the  United  States,  pp.  41-50, 

54-56. 

''■  Report  of  the  Commissioner  of  Corporations  on  the  Steel  Industry,, 
part  I,  pp.  68-72. 


10  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

This  second  dissolution  of  the  pool  was  followed  by  a  drastic 
reduction  in  prices.  Whereas  the  pool  price  for  steel  rails  had 
been  $28  per  ton,  upon  the  termination  of  the  pooling  agreement 
the  price  fell  to  $16.50.^ 

Another  important  pool  in  the  steel  industry  was  the  so-called 
wire  nail  pool,  organized  in  1895.^  The  Association  of  Wire  and 
Cut  Nail  Manufacturers  provided  for  a  division  of  the  output 
among  the  members  of  the  association,  and  also  fixed  the  amount 
of  nails  to  be  offered  for  sale  each  month,  and  the  price  at  which 
they  should  be  sold.  Immediately  upon  its  organization  the  pool 
advanced  the  price  of  nails.  Whereas  the  "  base  "  price  had  been 
$1.20  per  keg  in  June,  1895,  by  May,  1896,  it  had  risen  to  $2.55. 
In  view  of  the  fact  that  no  large  amount  of  capital  was  required 
to  engage  in  the  nail  business,  it  was  to  be  anticipated  that  the 
life  of  the  pool  would  be  short.  Whether  or  no  its  existence  was 
prolonged  by  its  audacious  price  policy,  it  came  to  an  end  in  De- 
ember,  1896,  about  a  year  and  a  half  after  its  organization. 

A  poo)  in  the  meat-packing  industry  was  organized  as  early  as 
1885;  and  since  that  date  pools  of  one  kind  or  another  have  been 
maintained  almost  steadily.^  The  pool  of  1885  determined  the 
quantity  of  meat  that  each  member  might  ship,  and  by  this 
means  succeeded  in  exercising  considerable  control  over  the 
price  of  meat.  In  1893  a  more  complete  and  effective  agreement 
was  entered  into.  As  the  result  of  this  agreement  the  represen- 
tatives of  Swift  and  Company,  Armour  and  Company,  and  Mor- 
ris and  Company  held  weekly  meetings,  which  were  occasion- 
ally participated  in  by  representatives  of  the  Cudahy  Packing 
Company,  and  Hammond  and  Company.  At  these  meetings 
each  of  the  companies  reported  on  its  shipments  into  designated 
territories  during  the  previous  week  and  on  the  prices  received. 
These  reports  served  as  the  basis  for  the  payment  of  fines  for 

1  Brief  for  the  United  States  in  United  States  v.  United  States  Steel  Cor- 
poration (no.  481),  vol.  I,  pp.  167-168. 

2  Report  of  the  Commissioner  of  Corporations  on  the  Steel  Industry, 
part  I,  pp.  72-73;  and  EdKcrton,  Political  Science  Quarterly,  12,  pp.  246-272. 

3  Report  of  the  Federal  Trade  Commission  on  the  Meat-Packing  Industry 
part  II,  ch.  I. 


POOLS  II 

overshipments  (40c.  per  100  lbs.),  and  for  the  allotment  for  the 
ensuing  week.  In  order  that  full  secrecy  as  to  these  arrange- 
ments might  be  maintained  and  the  consequences  of  legal  pro- 
ceedings avoided,  the  parties  to  this  agreement  were  designated 
by  certain  letters  of  the  alphabet  rather  than  by  their  real  names. 
This  poohng  arrangement  continued  from  1893  to  1896.  During 
1897  the  pool  was  not  effective  because  of  the  competition  of 
Schwarzschild  and  Sulzberger,  an  important  company  not  a 
memiber  of  the  pool.  The  following  year  a  new  pool  was  entered 
into,  including  this  time  the  firm  of  Schwarzschild  and  Sulz- 
berger. This  arrangment  lasted  until  April,  1902,  when  be- 
cause of  the  public  agitation  against  the  packers  a  decision 
was  made  to  dissolve  the  pool.  Thereupon  the  secretary 
destroyed  all  the  records  of  the  meetings  of  the  pool. 

The  chief  difficulty  in  this  third  type  of  pool  lay  in  securing 
an  agreement  upon  the  percentage  allotment,  both  at  the  organ- 
ization of  the  pool  and  upon  its  renewal  from  time  to  time.  An 
agreement  might  be  reached  at  the  time  the  pool  was  organized 
for  an  allotment  based  on  capacity,  previous  sales,  or  what  not. 
Yet  this  did  not  remove  the  difficulty;  for  each  company  was 
strongly  tempted  to  enlarge  its  plant,  in  order  that  upon  the  ex- 
piration of  the  pool  it  might  demand  an  increased  percentage  as 
a  condition  of  entry  into  a  new  pool.  If  this  demand  was  not 
acceded  to,  as  it  commonly  was  not,  it  became  impossible  to  ef- 
fect a  renewal  of  the  agreement;  and  with  the  increased  facilities 
for  production  the  market  was  flooded,  and  prices  fell,  perhaps 
even  lower  than  prior  to  the  formation  of  the  pool.  This  was 
well  illustrated  in  the  experience  of  the  steel  industry.  Upon  the 
disruption  of  the  steel  rail  pool  in  February,  1897,  the  price  of 
steel  rails  fell  to  $16.50,  which  was  about  $4  per  ton  below  the 
average  price  of  rails  during  the  six  months  preceding  the 
organization  of  the  pool. 

In  these  pools  regulating  or  apportioning  the  output  there  may- 
or may  not  have  been  an  agreement  as  to  price.  In  the  anthra^ 
cite  railroad  pool  of  1873,  for  example,  a  schedule  of  prices  was 
agreed  upon,  and  authority  was  given  to  a  Board  of  Control  to 
determine  the  prices  to  be  charged  from  time  to  time;  while  in 


12  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  pool  of  1885  in  this  same  industry  nothing  was  said  in  regard 
to  prices.  The  steel  rail  pool  of  1887  was  silent  on  the  subject  of 
prices;  but  the  powder  pool  of  1889,  known  as  the  Fundamental 
Agreement,  gave  a  central  board  full  power  to  fix  prices.  Yet 
whether  or  no  any  price-making  machinery  was  set  up,  it  was  reg- 
ulation of  prices  that  was  in  the  minds  of  those  who  were  instru- 
mental in  organizing  output  pools.  Obviously  prices  could  not 
be  maintained,  much  less  advanced,  unless  the  separate  concerns 
were  prevented  from  increasing  their  output  at  will;  and  the 
regulation  of  the  output  was  thus  the  means  whereby  the 
desired  control  over  prices  was  to  be  exercised. 

Fourth.  A  good  illustration  of  a  pool  providing  for  a  division 
of  the  field  is  the  agreement  between  the  Addyston  Pipe  and 
Steel  Company  and  live  other  corporations,  all  engaged  in  the 
business  of  manufacturing  cast  iron  pipe,  and  selling  in  particular 
to  municipal  corporations,  gas  companies,  water  companies, 
and  large  institutions  accustomed  to  invite  bids  from  various 
concerns.^  Under  this  agreement,  entered  into  in  1894  and 
modified  in  1895,  the  companies  divided  the  United  States  into 
three  parts:  reserve  cities,  free  territory,  and  pay  territory. 
The  reserved  cities  were  reserved  for  certain  companies,  and 
none  of  the  other  companies  was  to  do  any  business  there.  Free 
territory  was  territory  in  which  any  one  of  the  companies  could 
make  sales  without  restriction.  But  the  bulk  of  the  United 
States  (thirty-six  states  in  all)  was  designated  as  pay  territory; 
and  in  this  territory  (in  which  the  companies  had  a  practical 
monopoly  because  of  the  limitations  on  competition  imposed  by 
high  freight  rates)  the  conditions  of  carrying  on  business  were 
definitely  laid  down.  The  six  companies  were  to  refer  all  in- 
quiries for  pipe  in  this  section  to  a  representative  board,  and 
this  board  was  to  fix  the  price  at  which  all  pipe  in  pay  territory 
should  be  sold.  The  companies  were  then  to  bid  on  the  order,, 
and  the  one  that  offered  to  pay  the  highest  bonus  obtained  the 
contract,  which  was  to  be  executed  at  the  price  already  set  by 
the  board.    In  order  that  the  existence  of  the  pool  might  not  be 

»  17s  U.  S.  211-248;  and  Argument  of  Hon.  E.  B.  Whitney,  Ripley's 
Trusts,  Pools  and  Corporations  (1916),  pp.  78-96. 


POOLS  13 

suspected,  the  other  companies  were  to  make  fictitious  bids,  bids 
sufficiently  high  to  insure  that  the  contract  would  not  be  awarded 
to  them.  At  the  end  of  each  year,  after  deducting  the  expenses 
of  the  association,  the  bonuses  were  to  be  divided  among  the 
members  of  the  pool  on  the  basis  of  their  annual  shipments  into 
pay  territory.  The  profits  of  each  company,  therefore,  consisted 
of  the  excess  of  the  price  over  the  cost  on  the  jobs  awarded  to  it, 
plus  the  bonuses  received  by  it  on  work  taken  by  the  other  com- 
panies. These  profits  were  greater,  of  course,  than  they  would 
have  been  without  the  agreement,  since  the  price  to  be  charged 
for  pipe  was  fixed  by  the  representative  board,  and  therefore 
was  not  subject  to  competition  between  the  companies.  In  1899 
this  pool  was  declared  illegal  by  the  Supreme  Court  of  the 
United  States.^ 

A  division  of  territory  was  also  established  by  the  wire  nail 
pool ;  and  more  recently  by  the  meat  packers  as  regards  their  pur- 
chases of  cream  and  butter. 

In  the  tobacco  industry  an  international  pool  providing  for  a 
division  of  the  field  was  effected.  In  September,  1902,  the  Amer- 
ican Tobacco  Company  (the  American  trust)  and  the  Imperial 
Tobacco  Company  (a  British  combination)  entered  into  an 
agreement  whereby  the  trade  of  the  United  States,  Cuba,  Porto 
Rico,  Hawaii,  and  the  Philippines,  was  reserved  to  the  American 
Tobacco  Company,  and  the  trade  of  Great  Britain  to  the 
Imperial  Tobacco  Company.^  A  new  concern,  the  British- 
American  Tobacco  Company,  owned  by  the  two  companies 
above,  was  organized  to  handle  the  export  business  in  the  rest 
of  the  world.  The  earth,  like  Caesar's  Gaul,  was  divided  into 
three  parts. 

International  pools  have  also  been  established  in  the  steel 
rail,  thread,  glass  bottle,  aluminum,  gunpowder,  calcium  car- 
bide, and  meat  industries. 

Fifth.  Pools  sometimes  are  merely  selling  agencies.  The 
manufacturers  turn  over  their  total  output  to  a  central  selling 

1  See  p.  395. 

2  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  I,  pp.  166-176. 


14  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

bureau,  which  makes  all  the  sales.  A  good  illustration  is  the 
Michigan  Salt  Association,  an  organization  of  salt  producers 
effected  in  1876.^  This  association  hajndled  85  per  cent  of  the 
salt  output  of  the  important  Michigan  field.  The  producers 
made  a  contract  with  the  association  every  year,  and  under  the 
terms  of  the  contract  they  agreed  to  deliver  to  the  association  all 
the  salt  produced  by  them  during  the  course  of  the  year.  Each 
member  reserved  the  right  to  produce  as  much  salt  as  he  pleased, 
yet  since  the  association  had  complete  charge  of  sales,  it  could 
adjust  the  price  in  such  manner  as  to  prevent  overproduction. 
This  association  expired  by  limitation  in  1881,  but  was  immedi- 
ately reorganized  under  another  name.  In  1886  it  was  again 
reorganized,  this  time  under  its  original  name.  The  salt  associa- 
tion on  the  whole  was  quite  successful.  This  success  may  be 
attributed  to  the  fact  that,  like  all  selling  agencies,  it  did  away 
with  price  cutting  by  the  members  as  a  means  of  securing  in- 
creased business. 

A  more  recent  illustration  is  the  Continental  Wall  Paper 
Company  (1898),  a  New  York  corporation,  the  stock  of  which 
was  subscribed  to  by  a  group  of  concerns  manufacturing  98  per 
cent  of  the  country's  output  of  wall  paper."  As  the  selling  agent 
for  the  companies  in  the  pool,  the  Continental  Wall  Paper  Com- 
pany purchased  the  total  output  of  these  companies  at  prices 
fixed  in  the  agreement,  and  distributed  the  profits  among  them 
in  proportion  to  the  capacity  of  their  works.  But  the  Continen- 
tal Company  was  more  than  a  mere  selling  agency.  Its  directors 
were  constituted  a  committee  with  control  over  the  production  of 
the  individual  factories,  and  the  prices  at  which  wall  paper 
should  be  sold  to  the  trade.  The  company,  it  was  agreed,  was 
to  compel  jobbers  to  sign  an  agreement  to  buy  only  from  mem- 
bers of  the  pool  and  to  maintain  prices.  To  add  to  the  protective 
force  of  the  tariff  duties,  an  arrangement  was  made  with  the 
Canadian  wall  paper  manufacturers,  whereby  each  group 
agreed  not  to  compete  with  the  other.  Finally,  the  only  two 
manufacturers  in  this  country  of  wall  paper  machinery  were 

*  Jenks,  Political  Science  Quarterly,  3,  pp.  83-86. 

*  212  U.  S.  227-274. 


POOLS  15 

induced  to  confine  their  sales  of  machinery  to  members  of  the 
pool.^ 

Of  this  arrangement  the  Circuit  Court  said:  "A  more  complete 
monopoly  in  an  article  of  universal  use  has  probably  never  been 
brought  about.  It  may  be  that  the  wit  of  man  may  yet  devise  a 
more  complete  scheme  to  accomplish  the  stifling  of  competition; 
but  none  of  the  shifts  resorted  to  for  suppressing  freedom  of 
commerce  and  securing  undue  prices,  shown  by  the  reported 
cases,  is  half  so  complete  in  its  details."^  Nevertheless  within 
a  very  few  years  the  Continental  Company  found  its  power  gone. 
The  increased  prices  initiated  by  the  company  led  to  the  forma- 
tion of  new  concerns,  particularly  since  a  market  was  immedi- 
ately available  through  the  Continental  Company;  and  it 
proved  impossible  to  control  the  jobbers.^  The  liquidation  of 
the  company  was  therefore  determined  upon,  and  this  step 
occasioned  no  difficulty,  since  the  company  did  not  own  any 
operating  properties. 

Sixth.  A  sixth  type  of  pool  is  the  patent  pool.  In  1896  the 
General  Electric  Company  and  the  Westinghouse  Company — 
controlling  between  them  some  90  per  cent  of  the  manufacture 
of  electrical  supplies — entered  into  a  pooling  agreement  for  the 
joint  use  of  substantially  all  their  patents.'*  This  agreement 
put  an  end  to  costly  litigation,  and  also,  it  was  reported,  to 
competition  for  the  acquisition  of  additional  patents  from 
inventors. 

Some  pools  are  founded  on  the  ownership  of  patents  essential 
to  the  manufacture  of  a  particular  article.  Thus,  certain  manu- 
facturers of  enameled  iron  ware,  owning  valuable  patents,  joined 
forces  and  agreed  to  permit  the  use  of  these  patents  by  manufac 
turers  generally  upon  the  payment  of  royalty  and  upon  the  exe- 
cution of  a  license.^  The  license  agreement  established  a  sched- 
ule of  prices,  which  the  licensee  (the  manufacturer)  agreed  to 

^  148  Fed.  Rep.  947. 

*  Industrial  Commission,  XIII,  p.  284. 
*See  Chron.,  62,  pp.  476,  502  (1896). 
5  226  U.  S.  20-52. 


l6  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

observe ;  and  provision  was  made  for  changes  in  prices  from  time 
to  time  by  the  hcensor  with  the  approval  of  a  committee  repre- 
senting the  manufacturers.  Moreover,  the  jobbers  were  brought 
into  the  deal  by  the  refusal  of  the  manufacturers  to  sell  to  those 
jobbers  who  did  not  sign  an  agreement  to  handle  only  the  goods 
of  the  licensed  manufacturers  and  to  maintain  the  resale  prices 
as  fixed  from  time  to  time.  The  government  claimed  that  this 
was  a  price-fixing  device  in  the  guise  of  a  licensing  arrangement 
for  the  common  use  of  patents,  and  was  sustained  in  this  con- 
tention by  the  Supreme  Court. 

Having  indicated  the  forms  that  poohng  arrangements  have 
taken,  we  may  briefly  point  out  the  advantages  and  the  disad- 
vantages of  pools  as  a  device  for  restraining  competition.  With 
respect  to  the  advantages,  the  pool  provided  a  means  whereby 
manufacturers  could  cooperate  in  regard  to  prices  and  trade  con- 
ditions without  entirely  sacrificing  their  independence.  The 
American  business  man  was  an  individualist,  and  thus  looked 
kindly  on  a  business  arrangement  that  increased  his  profits  and 
yet  left  him  largely  the  manager  of  his  own  affairs.  The  pooling 
system  had  the  further  advantage  of  not  removing  the  financial 
inducement  to  economical  administration  of  the  individual  prop- 
perties.  Since  each  manufacturer  continued  to  operate  his  own 
factory,  it  was  possible  for  him  to  increase  his  profits,  not  only 
through  better  prices,  but  also  through  such  economies  in  pro- 
duction and  selling^  as  he  might  individually  put  into  effect. 
(However,  the  financial  inducement — though  it  was  not  removed 
— must  have  been  impaired,  as  compared  with  true  competitive 
conditions,  in  view  of  the  fact  that  a  manufacturer  who  desired  to 
increase  the  size  of  his  plant  in  order  to  realize  the  economies  of 
larger-scale  production  would  certainly  experience  great  difficulty 
in  securing  assent  to  an  increase  in  his  percentage  allotment.) 
A  third  advantage  was  that  the  pool  did  not  cause  overcapitali- 
zation nor  increased  expenses  in  the  way  of  taxes  and  fees. 
Finally,  it  provided  a  flexible  form  of  organization,  which  could 

1  Except  when,  as  in  the  central  selling  bureau,  he  no  longer  conducted 
the  sales. 


POOLS  17 

take  on  different  forms  by  way  of  adjustment  to  the  varying 
conditions  in  each  industry. 

Experience  has  shown  that  pooHng  agreements  have  more 
generally  been  attended  with  success  when  there  were  present 
the  following  favoring  factors:  (i)  the  requirement  of  large  cap- 
ital expenditure  as  a  condition  of  economical  production — this 
prevented  competition  from  arising  so  readily;  (2)  as  a  corol- 
lary of  the  above,  a  small  number  of  concerns  involved — 
this  facilitated  the  establishment  and  maintenance  of  a  compact 
organization;  (3)  a  willingness  to  adopt  a  farsighted  policy  with 
respect  to  output  and  prices — high  prices  might  temporarily  in- 
crease profits,  but  they  stimulated  competition,  and  thus  even- 
tually led  to  increased  output  and  lower  prices;  and  (4)  a  certain 
degree  of  uniformity  among  the  members  of  the  pool  with  re- 
spect to  the  size  and  nature  of  their  business — this  tended  to  give 
each  member  a  common  interest  in  the  success  of  the  pool. 

On  the  other  hand  pools  have  proven  to  be  weak  in  at  least 
two  important  particulars,  (i)  They  have  not  been  able  to 
maintain  a  sufficient  degree  of  stability  with  respect  either  to 
prices  or  to  industrial  policy.  The  individual  members  of  the 
pools  still  retained  a  large  degree  of  autonomy,  and  their  con- 
flicting interests  frequently  led  to  the  dissolution  of  the  agree- 
ment. Many  a  pool  has  been  wrecked  by  a  desire  on  the  part 
of  its  members  to  get  rich  too  quick.  Yet  even  if  the  pool  did 
not  raise  prices  so  high  as  to  invite  competition,  it  proved  very 
difficult  to  hold  the  pool  intact  during  a  period  of  declining  de- 
mand. A  reduction  of  output  became  imperative  in  order  to 
maintain  prices,  yet  this  meant  higher  costs,  because  of  the  dis- 
tribution of  fixed  expenses  over  a  smaller  output.  Hence  each 
member  was  tempted  to  sell  more  than  the  amount  allotted  to 
him.  The  only  possible  outcome  was  reduced  prices.  Thus, 
the  experience  of  pools  has  generally  been,  that  as  a  contrivance 
for  restricting  competition  they  are  but  temporarily  successful. 
(2)  Pooling  agreements  were  and  had  long  been  at  variance 
with  the  common  law.  According  to  the  common  law  pools 
were  negatively  illegal,  i.  e.,  they  were  merely  nonenforceable  in 
the  courts.  Even  therefore  before  by  the  Sherman  Act  of  1890 


1 8  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

they  became  positively  illegal,^  resort  was  had  in  some  indus- 
tries to  a  new  device  for  restraining  competition — the  trustee 
device.  A  description  of  this  new  expedient  will  form  the  sub- 
ject of  the  next  chapter. 

*  Railway  pools  were  made  illegal  by  the  Act  to  Regulate  Commerce  of 


CHAPTER  III 
THE  TRUSTEE  DEVICE 

The  first  resort  to  the  trustee  device  or  the  "  trust,"  as  it  will 
he  called  to  distinguish  it  from  the  modern  trust,  was  by  the 
Standard  Oil  Company.  Prior  to  1879  Mr.  John  D.  Rockefeller 
and  his  associates  had  acquired  a  large  number  of  oil  concerns 
in  the  interest  of  the  Standard  Oil  Company,  but  the  shares 
of  these  concerns  (instead  of  being  held  directly  by  the  Stand- 
ard Oil  Company)  had  been  registered  in  many  cases  in  the 
names  of  various  individuals  who  held  them  for  the  benefit  of 
the  company.  In  order  to  centralize  more  fully  the  control  of 
these  properties,  it  was  decided  in  1879  to  organize  the  Standard 
Oil   ''trust." 

The  "trust"  agreement  as  revised  in  January,  1882,  included 
about  forty  companies,  controlling  from  90  to  95  per  cent  of  the 
refining  capacity  of  the  country.^  It  provided  for  nine  trustees, 
among  whom  were  Messrs.  John  D.  Rockefeller,  William  Rocke- 
feller, H.  M.  Flagler,  and  John  Archbold.  The  trustees  received 
from  each  of  the  parties  to  the  agreement  an  assignment  of  their 
stock  with  voting  power,  and  in  return  therefor  gave  "  trust  cer- 
tificates" representing  the  valuation  of  the  properties.  The 
trustees  did  not  become  the  owners  of  the  stocks  deposited  with 
them ;  they  simply  held  them  in  trust  for  the  owners  of  the  trust 
certificates.  It  should  be  noted,  however,  that  these  stocks  were 
held  by  the  trustees  for  the  joint  account  rather  than  for  the  in- 
dividual account  of  the  certificate  holders;  a  stockholder  in  any 
one  company  lost  by  the  trust  agreement  his  title  to  the  stock 
of  that  particular  company,  and  secured  instead  a  proportionate 

1  Brief  for  the  United  States  in  Standard  Oil  Company  :;.  United  States 
(no.  725),  vol.  I,  p.  48.  A  copy  of  the  agreement  is  in  the  Report  of  the 
Commissioner  of  Corporations  on  the  Petroleum  Industry,  part  I,  pp.  361- 
370. 

19 


20        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

interest  in  all  the  stocks  and  property  held  by  the  trustees.* 
The  trustees  together  owned  466,280  of  the  trust  certificates 
out  of  a  total  of  700,000;  and  four  of  them  held  a  majority  of 
the  trust  certificates.  They  were  thus  able  to  elect  the  officers 
and  directors  of  each  of  the  constituent  companies,  and  to  man- 
age the  properties  in  complete  harmony. 

The  trustees  under  this  agreement  were  given  powers  sub- 
stantially similar  to  those  possessed  by  the  directors  of  an  ordi- 
nary holding  company.  They  were  to  collect  the  interest  and 
dividends  on  the  securities  held  in  trust,  and  to  redistribute 
such  portion  thereof  as  they  saw  fit  among  the  holders  of  the 
trust  certificates.  They  were  authorized  to  use  any  surplus 
trust  funds  to  purchase  the  bonds  and  stocks  of  other  companies 
engaged  in  the  oil  business,  and  to  hold  these  securities  for  the 
benefit  of  the  trust  certificates.  The  centralized  control 
provided  for  in  the  agreement  made  it  possible  for  the  trustees 
to  dismantle  those  refineries  that  were  poorly  located,  and  to 
build  new  works  at  strategic  points.  Obviously  it  made  no  dif- 
ference to  the  former  owners  of  a  given  plant  whether  or  not  that 
plant  was  operated,  since  they  received  a  certain  percentage  of 
the  profits  earned  by  all  the  companies.  The  trust  agreement, 
further,  made  provision  for  the  admission  of  new  companies  and 
individuals;  for  the  formation,  whenever  advisable,  of  a  Stand- 
ard Oil  Company  in  any  state  in  the  country.  The  duration  of 
the  agreement  was  to  be  for  a  period  of  twenty-one  years  after 
the  death  of  the  last  surviving  trustee,  but  provision  was  made 
for  the  termination  of  the  agreement  within  one  year  of  its  exe- 
cution upon  the  approval  of  nine-tenths  of  the  certificates  (in 
value),  and  within  ten  years  upon  the  approval  of  two-thirds  of 
the  certificates. 

The  success  of  the  Standard  Oil  "trust"  invited  imitation. 
In  1884  there  was  formed  the  American  Cotton  Oil  "  trust";  and 
in   1885   the  National  Linseed  Oil  "  trust. "  -    The  cotton  oil 

^This  consideration  proved  to  he  hij,dily  important  when  the  "trust" 
was  dissolved  in  1892.    See  p.  25. 

^  Conant,  Publications  of  the  American  Statistical  Association,  7,  p.  208 
(March,  1901). 


THE  TRUSTEE  DEVICE  21 

"trust"  included  some  seventy  mills,  located  for  the  most  part 
in  the  South,  engaged  in  manufacturing  and  refining  cotton  seed 
oil.^  Its  form  of  organization  was  precisely  like  that  of  the 
Standard.  However,  it  soon  met  with  difficulties  on  all  sides,  and 
in  1889  was  reorganized  as  the  American  Cotton  Oil  Company. 

In  1887  a  "  trust "  was  organized  in  the  whisky  business.  From 
1882  to  1887  some  eighty  distillers  had  maintained  a  precarious 
existence  through  pools.  These  pools,  however,  had  proven 
unsatisfactory;  it  had  not  been  possible  to  maintain  them.  Ac- 
cordingly the  leading  distillers  decided  to  establish  a  more  com- 
pact organization  modelled  on  the  Standard  Oil  trust  agreement 
of  1882.  This  was  accomplished  in  May,  1887.^  The  Distillers 
and  Cattle  Feeders'  Trust,  as  the  new  organization  was  called, 
comprised  about  eighty  companies,  located  mainly  in  New  York, 
Ohio,  Indiana,  Illinois,  Wisconsin,  Missouri,  and  Nebraska, 
manufacturing  from  85  to  90  per  cent  of  the  total  output  of  al- 
cohol and  spirits.  There  were  nine  trustees,  who  issued  trust 
certificates  in  exchange  for  the  shares  of  the  corporations  enter- 
ing the  "trust."  Inasmuch  as  the  trustees  held  a  majority  of 
the  stock  of  every  corporation,  they  were  able  to  elect  the 
directors  and  officers,  and  thus  to  control  the  management. 
This  in  turn  enabled  them  to  control  the  market,  for  instead  of 
exporting  the  surplus  at  a  loss,  as  had  been  done  by  the  earlier 
pools,  it  was  now  possible  to  limit  the  output  to  the  demand. 
It  also  lay  within  the  power  of  the  trustees  to  close  up  the  poor- 
est distilleries;  and  they  did  close  some  sixty-eight  of  them, 
the  output  being  concentrated  in  the  best  equipped  plants, 
with  a  consequent  saving  in  the  cost  of  production. 

Another  group  resorting  to  the  trustee  device  was  the  sugar 
refiners.  During  the  seventies  and  eighties  competition  in  the 
sugar  refining  industry  had  been  quite  keen;  between  1867  and 
1887  some  thirty-six  refineries  had  been  closed.^    By  1887  there 

^  Andrews,  Quarterly  Journal  of  Economics,  3,  p.  129. 

*  A  copy  of  the  agreement  is  in  House  Report  no.  4165,  50th  Cong.,  and 
Sess.,  pp.  57  seq.  See  ibid.,  pp.  64,  72,  91;  and  Jenks,  Political  Science 
Quarterly,  4,  pp.  305-308. 

'  Cf.  Jones,  Quarterly  Journal  of  Economics,  34,  p.  505. 


22         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

were  left  only  twenty-six  refineries,  operated  by  twenty-three 
companies.  The  concerns  that  survived  this  period  of  severe 
competition  were  those  that  resorted  to  large-scale  production, 
with  its  resulting  economies.  In  August,  1887,  seventeen  of 
these  companies,  owning  twenty  refineries,  and  possessing 
among  them  approximately  78  per  cent  of  the  refining  capacity, 
entered  into  a  trust  agreement  to  become  effective  October  i, 
1887.1 

In  its  main  provisions  this  agreement  was  substantially  like 
the  trust  agreements  already  described.  Eleven  trustees  con- 
stituted a  Board,  known  as  the  Sugar  Refineries  Company,  and 
distributed  trust  certificates  ($50,000,000)  to  the  shareholders 
of  the  corporations  in  return  for  the  securities  held  by  them. 
The  trustees  thereupon  caused  themselves  or  their  representa- 
tives to  be  elected  directors  of  the  separate  corporations,  and 
were  thus  able  to  manage  the  afifairs  of  all  in  unison.  It  was 
provided  that  15  per  cent  of  the  certificates  allotted  to  the  sev- 
eral companies  should  be  left  with  the  Board,  and  that  these 
and  any  part  of  the  $50,000,000  of  certificates  not  allotted  might 
be  employed  by  the  Board  for  the  acquisition  of  other  refineries 
or  for  certain  other  purposes.  A  unique  feature  of  the  sugar 
trust  deed  was  a  provision  that  no  trustee  should  be  interested 
directly  or  indirectly  in  the  purchase  or  sale  of  sugar,  whether 
for  the  purpose  of  speculation  or  otherwise,  without  the  consent 
of  a  majority  of  the  Board.  Of  the  twenty  refineries  acquired 
by  the  Sugar  Refineries  Company  twelve  were  soon  dismantled, 
and  the  other  eight  were  consolidated  into  four. 

In  this  same  year  (1887)  there  was  organized  the  National 
Lead  Trust  ^  and  the  Cordage  "trust. "  ^  The  latter,  known  as 
the  National  Cordage  Association,  controlled  at  this  time  only 
30  per  cent  of  the  country's  output  of  rope  and  cordage;  it  was 

1  Original  Petition  in  United  States  v.  American  Sugar  Refining  Company, 
pp.  38-40,  166.    For  a  copy  of  the  trust  agreement,  see  ibid.,  exh.  A. 

^  Conant,  Publications  of  the  American  Statistical  Association,  7,  p.  209 
(March,  1901). 

3  Dewing,    Corporate   Promotions   and   Reorganizations,   pp.    1 16-11 7, 


THE  TRUSTEE  DEVICE  23 

not  until  1891  that  it  attained  a  monopolistic  position  in  the 
industry. 

The  organization  of  these  "trusts"  was  followed  by  a  general 
outcry  against  monopolies.  How  fully  the  attention  of  the  pub- 
lic had  been  called  to  the  estabhshment  of  the  "trusts,"  and 
what  its  reaction  was,  is  shown  by  the  numerous  laws  forbidding 
combinations  and  trusts  enacted  by  the  state  legislatures  from 

1889  to  1893/  and  by  the  passage  by  the  National  Congress  in 

1890  of  the  Sherman  Anti-trust  Act,  which  prohibited  every 
contract,  combination  in  the  form  of  trust  or  otherwise,  or  con- 
spiracy, in  restraint  of  trade  or  commerce  among  the  several 
states,  or  with  foreign  nations,  and  every  monopoly  or  attempt 
to  monopolize.  And  as  it  soon  proved,  the  "trusts"  were  par- 
ticularly vulnerable,  much  more  so  than  the  pools.  The  pools, 
it  is  true,  were  unlawful,  but  they  were  secret  agreements,  and 
therefore  were  to  some  extent  free  from  attack.  The  Addyston 
Pipe  and  Steel  Company  is  the  most  conspicuous  instance  of  a 
pool  dissolved  by  legal  process,  and  the  evidence  here  was  ob- 
tained only  because  a  disgruntled  stenographer  painstakingly 
accumulated  it.  The  trust  agreements  of  the  eighties,  however, 
were  tangible  matters  of  record.  There  was  a  formal  transfer 
by  the  stockholders  of  their  legal  title  to  the  stock  of  the  con- 
stituent companies,  as  a  consideration  for  which  they  received 
trust  certificates.  The  rights  of  the  members  were  clearly  de- 
fined in  the  trust  agreement.  The  fact  could  not  be  concealed 
that  these  companies,  whose  corporate  existence  had  been  pre- 
served, had  almost    completely  sacrificed  their  independence. 

Hardly  had  the  "trusts"  been  created  when  legal  proceedings 

were  instituted  against  them.    The  state  of  Louisiana  attacked 

the  cotton  oil   "trust";    the   state  of  Nebraska,  the    whisky 

"trust";  ^  the  state  of  New  York,  the  sugar  "trust"; and  the 

^  At  least  six  states — Kansas,  Maine,  Michigan,  North  Carolina,  Tennes- 
see, and  Texas — passed  such  laws  in  1889. 

^  See  p.  312  for  the  decision  of  the  Supreme  Court  of  Nebraska;  and 
p.  316  for  the  decision  of  the  Supreme  Court  of  Illinois  declaring  illegal 
both  the  whisky  "trust"  of  1887  and  the  corporation  that  succeeded  in  1890 
to  its  business. 


24         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

State  of  Ohio,  the  oil  "trust."  The  action  against  the  sugar 
"trust"  came  in  1888.  In  that  year  the  Attorney  General  of 
New  York  State  brought  suit  under  the  common  law  against 
the  North  River  Sugar  Refining  Company,  a  New  York  corpor- 
ation, praying  that  the  charter  of  the  company  be  vacated  and 
the  company  dissolved.  In  a  decision  rendered  in  June,  1890, 
the  Circuit  Court  of  Appeals  decided  against  the  company.^ 
The  court  held  that  the  North  River  Sugar  Refining  Company, 
in  entering  the  "trust,"  had  given  over  the  control  of  its 
affairs  to  an  irresponsible  board,  and  that  such  delegation  of 
its  essential  corporate  powers  was  a  perversion  of  the  privi- 
leges conferred  by  the  company's  charter.  Furthermore,  the 
court  held  that  the  company  had  helped  to  create  a  trust 
which,  in  substance  and  effect,  was  a  partnership  of  separate 
corporations,  and  for  corporations  to  enter  a  partnership  was 
illegal.  The  company's  charter,  therefore,  was  taken  away,  and 
its  corporate  existence  terminated. 

The  Standard  Oil  "trust"  agreement  was  likewise  condemned 
by  the  courts.  In  May,  1890,  the  Attorney  General  of  Ohio 
filed  a  petition  against  the  Standard  Oil  Company  of  Ohio, 
charging  that  the  company  had  violated  the  laws  of  the  state  by 
placing  the  control  of  its  affairs  in  the  hands  of  trustees,  nearly 
all  of  whom  were  nonresidents  of  the  state.  Great  pressure 
was  brought  to  bear  on  the  Attorney  General  to  induce  him  to 
discontinue  the  suit,  but  without  success.  The  decision  of  the 
Supreme  Court  was  rendered  in  March,  1892. ^  As  in  New  York 
State,  the  "trust"  arrangement  was  declared  illegal,  though  the 
Ohio  court  put  more  emphasis  on  the  creation  of  a  monopoly. 
The  court  said:  "  the  observance  [of  this  agreement]  must  subject 
the  defendant  [the  Standard  Oil  Company  of  Ohio]  to  a  control 
inconsistent  with  its  character  as  a  corporation.  .  .  .  The  law 
requires  that  a  corporation  should  be  controlled  and  managed  by 
its  directors  in  the  interests  of  its  own  stockholders,  and  confor- 

'121  N.  Y.  Reports  582-626.  The  decision  is  described  in  more  detail 
on  p.  313. 

249  Ohio  State  Reports  137-189.  For  a  fuller  discussion  of  this  decision, 
see  p.  314. 


THE  TRUSTEE  DEVICE  2$ 

mable  to  the  purpose  for  which  it  was  created  by  the  laws  of  its 
state.  By  this  agreement,  indirectly,  it  is  true,  but  none  the  less 
effectually,  the  defendant  is  controlled  and  managed  by  the 
Standard  Oil  Trust,  an  association  with  its  principal  place  of 
business  in  New  York  City,  and  organized  for  a  purpose  contrary 
to  the  policy  of  our  laws.  Its  object  was  to  establish  a  virtual 
monopoly  of  the  business  of  producing  petroleum,  and  of  man- 
ufacturing, refining  and  dealing  in  it  and  all  its  products, 
throughout  the  entire  country,  and  by  which  it  might  not  merely 
control  the  production,  but  the  price  at  its  pleasure.  All  such 
associations  are  contrary  to  the  policy  of  our  state  and  void." 
The  court  did  not  order  the  dissolution  of  the  Standard  Oil 
Company,  as  urged  in  the  petition,  but  simply  commanded  it  to 
cease  its  connection  with  the  "trust." 

Any  expectation  that  the  decision  of  the  Supreme  Court  of 
Ohio  would  put  an  end  to  the  oil  monopoly  proved  to  be 
unfounded  when  the  nature  of  the  dissolution  became  apparent. 
On  March  21,  1892,  at  a  meeting  of  the  trust  certificate 
holders,  a  resolution  terminating  the  "trust"  was  adopted.^ 
At  this  time  the  stocks  of  eighty-four  companies  were  held  by 
the  Standard  Oil  trustees.  On  April  i  the  stocks  of  sixty-four  of 
these  corporations  were  transferred  to  some  one  of  the  remain- 
ing twenty.  This  left  the  stocks  of  twenty  companies  in  the 
hands  of  the  trustees,  and  these  they  proceeded  to  distribute 
among  the  holders  of  the  trust  certificates.  There  were  out- 
standing at  this  time  $97,250,000  trust  certificates.  The  trus- 
tees, who  became  liquidating  trustees,  divided  the  stock  of 
each  of  the  twenty  companies  into  972,500  parts.  They  then 
offered  to  give  to  each  trust  certificate  holder  in  exchange  for 
each  share  1/972,500  part  of  the  stock  of  each  one  of  the  twenty 
corporations.  The  only  ones  who  accepted  this  offer  were  the 
trustees  (themselves  the  largest  certificate  holders)  and  the 
members  of  their  families  and  their  immediate  associates.  The 
smaller  trust  certificate  holders  were  discouraged  from  liquidat- 
mg  by  the  fact  that  they  would  have  received  only  fractional 

1  On  the  dissolution  scheme  see  Brief  for  the  United  States  in  Standard  Oil 
(Company  v.  United  States  (no.  725),  vol.  I,  pp.  56-58,  60-61,  70,  72. 


26        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

shares  in  the  twenty  companies,  and  these  companies  declined  to 
pay  dividends  on  fractional  shares.  Dividends  continued  to  be 
paid,  however,  on  the  trust  certificates  when  not  Hquidated.  The 
nine  trustees,  therefore,  became  the  holders  of  the  majority  of 
the  stocks  of  the  twenty  companies,  and  as  liquidating  trustees 
they  also  held  the  stocks  not  exchanged  for  trust  certificates. 
This  dissolution  obviously  was  nominal;  it  effected  no  real 
change  in  the  situation.  In  fact,  Mr.  Archbold  admitted  before 
the  Industrial  Commission  that  the  companies  worked  together 
after  the  dissolution  as  harmoniously  as  before.^ 

It  was  apparent  that  the  Standard  interests  had  not  attempted 
to  obey  the  court's  order,  but  had  stooped  to  a  mere  subter- 
fuge. A  new  suit,  therefore,  was  instituted  in  1897  against  the 
Standard  Oil  Company  for  failure  to  obey  the  court's  decree  of 
March,  1892.  This  suit  dragged  along  until  December,  1900, 
when  it  was  dismissed.  Meanwhile  the  Standard  Oil  Company 
had  reorganized  as  a  holding  company.^ 

ij,  p.  574.  2  See  p.  56. 


CHAPTER  IV 

THE  MODERN  TRUST  MOVEMENT 

The  decisions  of  the  New  York  and  Ohio  courts  in  1890  and 
1892,  respectively,  showed  that  even  without  the  prohibitions 
of  the  Sherman  Anti-trust  Act  the  "trust,"  so  far  as  the  law  was 
concerned,  was  not  a  permissible  form  of  business  organization. 
The  Standard  Oil  interests,  it  is  true,  avoided  collision  with  the 
law  for  a  time  by  the  development  of  a  community  of  interest, 
but  this  loose  form  of  organization  proved  satisfactory  mainly 
because  there  already  existed  among  the  members  an  unusual 
degree  of  mutual  confidence  and  good  will.  It  appeared,  there- 
fore, that  unless  some  new  expedient  for  restraining  competition 
could  be  hit  upon,  the  manufacturers  insistent  upon  holding 
competition  in  check  must  needs  resort  once  more  to  pool- 
ing agreements.  Yet  this  was  even  less  desirable  than  before 
from  the  manufacturers'  standpoint,  since  the  Sherman  Anti- 
trust law  had  been  passed  in  1890.  This  act  made  pools,  when 
effecting  a  restraint  of  trade,  not  only  unenforceable,  as  under 
the  common  law,  but  actually  illegal;  and  their  existence  would 
therefore  have  to  be  kept  secret.  By  what  means  then  were  the 
manufacturers  to  secure  relief? 

The  new  expedient  to  restrain  competition  was  the  modern 
trust.  The  trust  was  effected  in  one  of  two  ways:  either  by 
means  of  a  security  holding  corporation,  that  is,  a  company  own- 
ing all  or  part  of  the  securities  of  other  companies;  or  by  means 
of  a  property  holding  corporation,  that  is,  a  company  owning 
outright  the  plants  and  other  property  of  the  companies  to  be 
united  in  the  trust. 

First.  The  holding  corporation  is  a  type  of  business  organ- 
ization employed  to  combine  a  group  of  corporations  by  owning 
all  or  a  majority  of  the  stock.  The  holding  company,  whether 
a  newly  created  corporation  or  one  already  in  existence,  must 

27 


28  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

possess  legislative  authority  to  hold  the  stocks  of  other  corpora- 
tions. Armed  with  such  authority  it  proceeds  to  purchase, 
either  with  cash  or  with  its  own  securities,  a  majority  at  least 
of  the  shares  of  the  companies  which  it  plans  to  combine.  The 
controlled  companies  maintain  their  separate  existence,  they 
have  their  separate  officers  and  managers,  and  they  are  nom- 
inally independent;  yet  inasmuch  as  the  holding  company  elects 
their  directors,  it  can  effectively  control  their  management 
and  operate  their  properties  in  accordance  with  a  unified 
plan. 

The  holding  corporation  was  thus  after  all  but  a  modification 
of  the  illegal  "trust"  which  it  was  designed  to  supersede.  As 
Professor  Meade  has  pointed  out,^  the  only  important  changes 
effected  were:  the  substitution  of  the  shares  of  the  holding  com- 
pany for  the  certificates  of  the  old  "trust";  the  substitution  of 
the  relation  of  owner  for  the  relation  of  trustee;  and  the  sub- 
stitution of  a  board  of  directors  for  a  board  of  trustees.  It  would 
appear  therefore  that  from  the  point  of  view  of  legal  principle 
the  new  arrangement  was  quite  as  unlawful  as  the  old. 

What  then,  it  may  be  asked,  was  to  be  gained  by  adopting 
the  new  form  of  organization?  The  possible  gain  was  two-fold. 
From  a  legal  point  of  view  the  holding  company  might  prove 
less  vulnerable.  The  old  "trust"  was  an  agreement  between  a 
body  of  trustees  and  a  group  of  corporations,  which,  through  the 
action  of  a  majority  of  their  stockholders,  surrendered  their  in- 
dependence, and  in  so  doing  exceeded  their  corporate  powers. 
The  holding  company,  however,  was  authorized  by  law  to  hold 
the  securities  of  other  companies.  As  a  device  for  restraining 
competition  it  had  not  yet  been  declared  illegal,  and  there  was 
at  least  the  possibility  that  it  might  successfully  withstand  an 
attack  upon  its  validity.  Yet  even  if  ultimately  its  fate  did 
prove  to  be  that  of  the  "  trust,"  a  second  gain  was  possible.  The 
organization  of  the  holding  company  insured  a  temporary  res- 
pite from  competition,  and  presumably  the  profits  thus  realized 
would  be  retained  by  the  corporation  or  its  stockholders,  and 
would  not  need  to  be  returned  to  the  consumers  from  whom 
'  Trust  Finance,  p.  36. 


THE  MODERN  TRUST  MOVEMENT  29 

they  had  come.  Barring  heavy  penalties  for  the  employment  of 
an  illegal  device,  there  was  much  to  gain  in  the  organization  of 
a  holding  company  trust  and  little  to  lose. 

If  the  holding  company  as  a  means  of  eliminating  competition 
presented  such  attractive  possibilities,  why  was  it  not  adopted 
earlier?  The  reason  is  that  no  express  legislative  sanction  ex- 
isted for  the  creation  of  a  holding  company.^  The  power  to  buy 
and  sell  the  stocks  of  other  corporations,  like  all  other  corporate 
powers,  is  one  derived  from  legislative  authority;  and  during  the 
period  when  "trusts"  were  being  formed  (1879-1SS7)  no  state 
had  passed  a  general  law  specifically  granting  this  privilege. 
Such  few  holding  companies  as  existed  had  been  created  under 
special  laws.  One  of  the  first  holding  companies  of  any  con- 
sequence to  be  authorized  was  the  Pennsylvania  Company, 
chartered  in  the  interest  of  the  Pennsylvania  Railroad  Com- 
pany in  1S70,  and  empowered  "to  make  purchases  and  sales 
for  investments  in  the  bonds  and  securities  of  other  companies. " 
The  reason  for  this  special  enactment  was  to  permit  the  Penn- 
sylvania Railroad  to  centralize  the  control  of  certain  lines  that 
were  closely  affiliated  with  it.- 

An  arrangement  of  somewhat  the  same  sort  was  made  use  of 
by  the  Philadelphia  and  Reading  Railway  in  the  early  seventies. 
This  railway  was  anxious  to  possess  anthracite  coal  properties 
in  order  to  insure  an  ample  coal  traffic  for  the  future.  Under  its 
charter,  however,  it  had  no  authority  to  own  coal  lands.  It 
therefore  had  incorporated  in  its  interest  the  Laurel  Run  Im- 
provement Company,  which  was  authorized  by  its  charter  to 
buy  coal  lands  and  to  mine  coal.  The  charter  further  provided 
that  the  stock  of  this  mining  company  might  be  acquired  by  any 
Pennsylvania  railroad  or  mining  company.  Thereupon  the 
Philadelphia  and  Reading  Railway  proceeded  to  buy  all  the  coal 
company's  stock,  and  thus  indirectly  it  secured  the  power  to  act 
as  a  holding  company  in  this  particular  instance.^ 

Save  for  some  such  exceptional  cases  as  these,  the  holding  by 

1  Noyes  on  Intercorporate  Relations  (second  edition),  sees.  5,  264  ff. 

2  See  Annual  Report  of  the  Pennsylvania  Railroad,  1871,  p.  19. 

3  Jones,  The  Anthracite  Coal  Combination  in  the  United  States,  p.  30. 


30  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

one  corporation  of  stock  in  another  corporation  was  not  legal, — 
or  at  least  had  not  been  so  held  by  the  courts.  And  in  view  of 
the  popular  hostility  towards  trusts,  which  resulted  in  a  wave  of 
anti-trust  legislation  after  1889,  it  was  hardly  to  be  expected 
that  any  state  would  go  out  of  its  way  to  extend  assistance  to 
those  who  were  searching  for  a  new  device  to  legalize  their  opera- 
tions. The  unexpected,  however,  came  to  pass.  It  was  the  state 
of  New  Jersey  that  came  to  the  rescue. 

Whether  or  not  the  legislators  realized  the  full  significance 
of  their  action,^  the  state  of  New  Jersey  amended  its  corporation 
law  in  May,  1889,  and  provided  that  the  directors  of  any  com- 
pany organized  under  the  act  of  1875  might  purchase  "  the  stock 
of  any  company  or  companies  owning,  mining,  manufacturing 
or  producing  materials,  or  other  property  necessary  for  their 
business,"  and  issue  its  own  stock  in  payment  therefor.^  Four 
years  later,  in  1893,  the  doors  were  thrown  completely  open  to 
the  creation  of  holding  companies  by  the  enactment  of  a  pro- 
vision that  any  corporation  might  purchase  and  hold  the  se- 
curities of  any  other  corporation  no  matter  in  what  state  incor- 
porated, and  might,  while  the  owner,  exercise  all  the  rights  of 
ownership.^  No  operating  duties  were  required  of  the  holding 
company;  its  duties  were  simply  the  ownership  of  stock,  the 
election  of  officers  and  directors,  the  receipt  of  dividends  from 
the  constituent  companies,  and  the  payment  of  these  dividends 
in  whole  or  in  part  to  its  own  stockholders. 

^The  charge  has  been  made  that  some  of  the  trusts  "are  a  product  of 
legislation  obtained  by  their  own  lawyers  and  legislative  agents,  put  quietly 
through  under  the  cover  of  the  anti-trust  agitation,  while  the  public,  led  by 
the  newspapers,  were  looking  somewhere  else."  Whitney,  former  Assistant 
Attorney  General  of  the  United  States,  Publications  of  American  Economic 
Association,  3rd  series,  vol.  6,  part  II,  p.  4  (Papers  and  Proceedings). 

2  Dill,  The  Statute  and  Case  Law  of  the  State  of  New  Jersey  relating  to 
Business  Companies  (1910),  p.  80. 

•''  Dill,  op.  cit.,  p.  80.  The  section  in  full  read:  "Any  corporation  may 
purchase,  hold,  sell,  assign,  transfer,  mortgage,  pledge  or  otherwise  dispose  of 
the  shares  of  the  capital  stock  of,  or  any  bonds,  securities,  or  evidences  of 
indebtedness  created  by  any  other  corporation  or  corporations  of  this  or  any 
other  state,  and  while  owner  of  such  stock  may  exercise  all  the  rights,  powers 
and  privileges  of  ownership,  including  the  right  to  vote  thereon." 


THE  MODERN  TRUST  MOVEMENT  3 1 

The  example  set  by  New  Jersey  was  soon  followed  by  other 
states  determined  to  prevent  New  Jersey  from  securing  a 
monopoly  of  incorporation  fees  and  other  fees  and  taxes.  Among 
the  numerous  states  that  revised  their  general  corporation  laws 
to  permit  the  creation  of  holding  companies  were  Delaware, 
Maine,  West  Virginia,  and  New  York,  these  states  being  con- 
spicuous for  the  "  liberal "  character  of  their  legislation.^ 

One  of  the  first  companies  to  avail  itself  of  the  New  Jersey 
legislation  was  the  American  Cotton  Oil  "Trust."  Fearing 
lest  the  "trust"  should  prove  illegal,  it  reorganized  in  New 
Jersey  in  October,  18S9,  as  the  American  Cotton  Oil  Company, 
a  holding  company  possessing  the  stocks  of  sixteen  constituent 
concerns.^  The  American  Cotton  Oil  Company  also  operated  a 
large  refinery  in  New  Jersey  on  its  own  account,  but  it  was 
primarily  a  holding  company. 

In  spite  of  the  advantages  of  the  holding  company  plan, 
however,  few  concerns  availed  themselves  at  once  of  the 
opportunity  thereby  afforded  of  organizing  a  trust.  Thus,  the 
Standard  Oil  "trust,"  though  declared  illegal  in  1892  and  obliged 
to  reorganize,  did  not  seek  refuge  in  New  Jersey,  but  relied 
instead  on  the  community  of  interest  plan.  That  more  New 
Jersey  holding  companies  were  not  formed  is  partly  explained  by 
the  unsatisfactory  state  of  business  during  the  early  life  of  the 
law,  the  period  from  1893  to  1897  being  one  of  severe  industrial 
depression,  when  the  flotation  of  new  issues  of  securities  would 
have  proved  difficult;  and  partly  by  the  fact  that  use  was  made 
of  the  other  method  of  forming  a  modern  trust,  namely,  the 
property  owning  corporation. 

Second.  Most  of  the  trusts  or  attempted  trusts  organized  in 
the  years  immediately  following  the  court  decisions  declaring 
the  "trusts"  or  "trust"  agreements  illegal,  took  the  form,  not  of 
a  security  holding  company,  but  a  property  holding  company. 
This  second  type  of  trust  came  into  being  in  at  least  three 

1  The  statutes  of  the  different  states  authorizing  corporations  to  acquire 
stock  in  other  corporations  are  given  in  Noyes  on  Intercorporate  Relations 
(second  edition),  sec.  271. 

2  Industrial  Commission,  XIII,  p.  680. 


32  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

different  ways:  (i)  by  means  of  a  consolidation  or  merger;  (2) 
by  means  of  purchase  and  sale;  and  (3)  by  means  of  exchange  of 
property  for  stock.^ 

(i)  Consolidation  or  merger  may  be  defined  as  the  union  in 
one  corporate  body  of  two  or  more  existing  corporations.-  In 
effecting  a  consolidation  the  property  and  business  of  one  or  more 
companies  is  turned  over  to  the  consolidated  company,  whether 
or  no  this  be  a  newly  created  corporation  or  one  already  existing.^ 
By  the  act  of  consolidation  the  separate  companies  completely 
lose  their  identity,  unless  indeed  their  existence  is  maintained 
for  some  special  purpose,  such  as  the  adjustment  of  claims.^   The 

1  In  common  usage  the  terms  "  purchase  "  and  "  sale  "  are  applied  to  the 
acquisition  by  one  corporation  of  the  property  of  others  in  exchange  for  its 
stock  (see  Noyes  on  Intercorporate  Relations,  second  edition,  sec.  319); 
and  it  may  be,  therefore,  that  our  classification  of  property  owning  trusts  is 
more  minute  than  is  necessary. 

2  Some  legal  authorities  make  a  distinction  between  a  consolidation 
and  a  merger.  Thus,  Thompson,  Law  of  Private  Corporations  (second 
edition)  says,  "there  seems  to  be  a  recognized  difference  between  'consolida- 
tion' and  'merger'"  (sec.  6035).  "Consolidation  takes  place  where  two  or 
more  existing  corporations  are  consolidated  into  a  single  corporation,  and  the 
existence  of  the  uniting  corporations  is  terminated  and  the  consolidated 
companj'  succeeds  in  a  general  way  to  the  rights  and  franchises  and  acquires 
the  property  and  assumes  the  obligations  and  lial)ilities  of  all  the  constituent 
companies"  (sec.  6035).  A  merger,  on  the  other  hand,  "exists  where  one  of 
the  constituent  companies  remains  in  being,  absorbing  or  merging  in  itself 
all  the  other  companies"  (sec.  6037).  But  in  Judicial  and  Statutory  Defi- 
nitions of  Words  and  Phrases,  1914,  p.  908,  we  are  told  that  the  terms  con- 
solidation and  merger  are  not  always  used  with  strict  accuracy.  As  one 
authority  puts  it  (ibid.,  1904,  p.  1452),  the  term  consolidation  is  an  elastic 
one,  and  may  include  a  union  of  two  or  more  corporations  into  a  new  one 
with  a  different  name,  with  or  without  extinguishing  the  constituent  cor- 
porations, or  the  merging  of  two  or  more  cor[)orations  into  one  existing 
corporation  under  the  name  of  the  latter.  See  also  Noyes  on  IntcrcorjHjrate 
Relations  (second  edition),  sees.  7-8.  For  our  purposes  there  is  nothing 
in  particular  to  be  gained  by  determining  whether  the  property  of  the 
companies  combined  has  been  turned  over  to  a  new  corporation  or  has  beep 
acquired  by  an  already  existing  corporation;  and  we  shall  therefore  use  the 
words  consolidation  and  merger  interchangeably. 

'  See  footnote  above. 

*  Thompson  on  Corporations  (second  edition),  sec.  6041. 


THE  MODERN  TRUST  MOVEMENT  33 

consolidation  thus  represents  the  complete  fusion  of  two  separate 
businesses. 

A  consolidation  is  ultra  vires  unless  authorized  by  legislative 
authority;  and  the  legislature  may  withhold  its  consent  entirely, 
or  it  may  permit  consolidation  upon  such  conditions  as  it  chooses 
to  impose.^  Legislative  approval  of  consolidation  may  be  given 
in  various  ways.-  The  legislature  may  provide  for  consolidation 
under  a  general  corporation  law;  and  most  states  through  such 
kiws  now  permit  the  formation  of  consolidations  for  lawful 
purposes.  It  may  grant  the  constituent  companies  charters 
permitting  consolidation  under  certain  conditions.  It  may  even 
give  its  approval  after  the  fact  by  the  recognition  of  the  consoli- 
dated corporation;  and  such  legislative  recognition  is  equivalent 
to  legislative  ratification.  When  tlie  corporations  to  be  con- 
^oUdated  are  creatures  of  different  states  the  approval  of  each 
separate  state,  by  general  law  or  otherwise,  is  necessary  to 
make  the  consolidation  valid.^ 

Yet  even  if  the  legislature  has  given  its  assent,  no  corporation 
can  consolidate  with  another  without  the  consent  of  the  stock- 
holders. If  the  charter  of  a  company  gives  it  authority  to 
consolidate,  or  if  any  general  law  in  force  at  the  time  when  the 
company  was  chartered  permits  consolidation,  only  the  consent  of 
a  majority  of  the  shareholders  is  required;  otherwise  the  consent 
of  all  the  shareholders  is  necessary.^  A  dissenting  stockholder 
in  the  latter  case  can  not  be  compelled  to  give  his  assent,  and  his 
consent  can  not  be  implied. 

When  the  consent  of  the  legislature  and  of  the  stockholders 
has  been  secured,  the  process  of  effecting  a  consolidation, 
as  already  pointed  out,  is  for  the  separate  companies  to 
transfer  their  property  and  assets  to  the  consolidated  com- 
pany, whereupon  they  become  extinguished.^  The  consoli- 
"dated  company  is  thus  an  operating  unit,  in  contrast  with  the 

1  Thompson  on  Corporations  (second  edition),  sees.  6043,  6045. 

-  Noyes  on  Intercorporate  Relations  (second  edition),  sec.  20. 

*  Ibid.,  sec.  100. 

^Morawetz  on  Private  Corporations,  sec.  951. 

^  Unless  one  of  them  becomes  the  consolidated  company. 


34  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

holding  company,  which  ordinarily  is  not  an  operating  unit 
at  all.^ 

(2)  Purchase  and  sale.  "It  is  an  elementary  principle  of  cor- 
poration law  that  a  corporation,  subject  to  the  limitations  of 
its  charter  and  constitutional  and  statutory  prohibitions,  has 
inherent  power  to  acquire  and  hold  any  property,  real  or 
personal,  reasonably  useful  or  convenient  in  carrying  on  the 
business  for  which  it  was  organized."  ^  A  private  corporation — 
but  not  a  quasi-public  corporation,  such  as  a  railroad — may 
even  dispose  of  its  entire  property  with  the  unanimous  consent 
of  the  stockholders,  providing  the  purpose  is  not  unlawful  nor 
fraudulent.  If  within  the  powers  expressly  granted  to  it,  it  may 
accept  stock  in  other  corporations  in  payment  for  the  property 
sold.  If  the  corporation  whose  property  is  to  be  disposed  of  is  a 
losing  one,  the  consent  of  only  a  majority  of  the  stockholders 
suffices;  and  this  is  also  true  in  the  case  of  a  prosperous  corpo- 
ration, when  the  sale  of  its  entire  assets  is  made  for  legitimate 
business  reasons.^  Though  some  trusts  were  organized  through 
sales  to  them  of  corporate  property,  it  is  hardly  necessary  to 
point  out  that  such  sales,  if  made  for  an  unlawful  purpose, 
were  ultra  vires  of  the  corporation. 

It  is  necessary  to  distinguish  between  a  sale  and  a  consolida- 
tion. In  a  sale  the  vendor  parts  solely  with  its  property,  for 
which  it  receives  a  quid  pro  quo.  The  vendor  may  then  proceed 
to  buy  further  property,  if  it  desires.  But  in  a  consolidation  the 
vendor  not  only  parts  with  its  property,  but  also  with  the  legal 
right  to  own  or  acquire  property.  Obviously  the  vendor  could 
not  receive  any  consideration  for  the  transfer;  for  the  act  of 
consolidation  involves  its  extinguishment.  The  fact  that  the 
consolidated  company  makes  payment,  not  to  the  vendor 
corporation,  but  to  its  stockholders,  characterizes  the  trans- 
action as  a  consolidation  rather  than  a  purchase;  if  the  trans- 

^  For  an  excellent  statement  of  the  law  relating  to  consolidation  of  corpora- 
tions, see  Noyes  on  Intercorporate  Relations  (second  edition),  sees.  7-107. 

^  Noyes  on  Intercorporate  Relations  (second  edition),  sec.  108.  On 
the  subject  of  sales  of  corporate  property,  see  ibid.,  sees.  108-117. 

'  See  Warren,  Harvard  Law  Review,  30,  p.  358, 


THE  MODERN  TRUST  MOVEMENT  35 

action  were  merely  a  purchase  and  sale,  the  company  acquiring 
property  would  pay  the  vendor  corporation,  which  would  then 
settle  with  its  stockholders. 

(3)  Exchange  of  property  for  stock.^  A  private  corporation 
may  not  only  sell  its  entire  assets,  as  just  explained,  but  it  may 
also  exchange  its  assets  for  any  other  property  that  it  is  em- 
powered to  acquire.  If  the  vendor  corporation  has  power  to  hold 
stock  in  another  corporation,  it  may  transfer  its  property  to  the 
proposed  trust,  and  receive  its  stock  in  exchange.  Such  an 
exchange  differs  from  a  sale  in  this  respect,  inter  alia,  that  a  sale 
of  the  entire  property,  when  incident  to  dissolution,  may  be 
accomplished  on  occasion  through  a  majority  vote;  whereas  an 
exchange  of  the  entire  property  for  stock  requires  the  unanimous 
consent  of  the  stockholders;  the  majority  cannot  force  the 
minority  into  a  new  company  against  its  will. 

The  stock  received  in  the  process  of  exchange  belongs,  of 
course,  to  the  corporation  that  has  transferred  its  property.  But 
the  corporation,  with  the  unanimous  consent  of  its  stockholders, 
may  enter  into  an  agreement  that  the  stock,  instead  of  being 
delivered  to  it,  shall  be  distributed  among  its  stockholders  pro 
rata.  Such  an  agreement  is  the  equivalent  of  a  liquidation  of  the 
company's  business  by  unanimous  consent,  but  in  the  absence  of 
statutory  provisions  to  the  contrary  is  a  valid  arrangement. 

On  some  occasions  property  owning  trusts  were  formed 
through  the  use  of  the  holding  company  as  an  intermediary  stage. 
The  holding  company  having  acquired  a  majority  or  all  of  the 
stock  of  the  constituent  companies  was  obviously  in  a  position, 
particularly  if  it  had  acquired  all  of  the  stock,  to  cause  the  under- 
lying property  to  be  conveyed  to  it,  and  the  separate  companies 
to  be  dissolved.  Upon  the  completion  of  these  transactions  the 
trust  owned,  not  stocks,  representing  the  title  to  plants,  but  the 
plants  themselves. 

The  formation  of  a  trust  through  the  exchange  of  its  stock  for 
the  property  of  the  companies  to  be  united  would  appear  to  have 
been  provided  for  at  an  early  date  by  the  same  New  Jersey  law 

^  On  this  subject  see  Noyes  on  Intercorporate  Relations  (second  edition), 
sees.  nS-izga, 


36  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

to  which  reference  has  already  been  made.^  By  an  amendment 
to  section  55  of  its  general  incorporation  law  of  1875  the  state  of 
New  Jersey  in  1S89  authorized  the  directors  of  any  company 
incorporated  under  the  act  to  purchase  mines,  manufactories, 
and  other  property  necessary  for  their  business,  and  to  issue 
stock  in  payment  therefor.-  Apparently  New  Jersey  was  not 
influenced  by  the  popular  clamor  against  trusts,  and  did  not 
propose  to  stop  at  halfway  measures  of  protection. 

The  American  Tobacco  Company,  incorporated  in  New 
Jersey  in  1890,  illustrates  a  property  owning  trust,  as  distinct 
from  a  holding  company  trust.  This  company,  among  the  first 
of  the  modern  trusts,  exchanged  its  capital  stock  directly  for 
the  plants,  business,  brands,  and  good  will  of  five  cigarette 
companies.^  The  Continental  Tobacco  Company  (the  plug 
tobacco  trust),  organized  in  New  Jersey  in  1898,  was  the  same 
type  of  trust,"*  as  was  also  the  second  American  Tobacco 
Company,  organized  in  1904  for  the  purpose  of  uniting  a  number 
of  tobacco  concerns  (including  the  original  American  Tobacco 
Company  and  the  Continental  Company)  that  had  been  held 
together  since  1901  through  the  ConsoUdated  Tobacco  Company 
(a  holding  company). 

The  American  Sugar  Refining  Company,  incorporated  in 
New  Jersey  in  1891,  is  another  early  property  owning  trust.^ 
The  Sugar  Refineries  Company  (the  "trust")  having  been 
declared  illegal,  the  trust  certificates,  by  agreement  among  all 
the  parties,  were  exchanged  for  the  shares  of  the  American 
Sugar  Refining  Company.  Through  the  acquisition  of  these 
trust    certificates,    the    American    Sugar    Refining    Company 

1  See  p.  30. 

2  See  the  General  Law  of  the  State  of  New  Jersey  concerning  Corporations, 
approved  April  7,  1875,  together  with  Acts  Amendatory  thereto  in  force 
July  I,  1889,  p.  34. 

*  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  I,  p.  65. 

*  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  I,  pp.  gg-ioo. 

*  Original  Petition  in  United  States  :;.  American  Sugar  Refining  Company, 

pp.  47-5o> 


THE  MODERN  TRUST  MOVEMENT  37 

secured  control  over  all  the  stock  of  the  various  corporations 
formerly  controlled  by  the  trustees.  It  was  thus  temporarily  a 
holding  company.  The  next  step  was  to  have  the  several 
corporations  convey  to  it  their  entire  property,  whereupon  they 
were  dissolved.  The  result  was  to  make  the  American  Sugar 
Refining  Company  the  actual  owner  of  all  the  property  pre- 
viously held  in  trust  by  the  trustees  under  the  Sugar  Refineries 
Company  deed. 

In  passing,  the  relative  merits  of  holding  company  trusts  and 
property  owning  trusts  from  the  standpoint  of  trust  managers 
may  be  briefly  reviewed.^  The  chief  advantages  of  the  holding 
company  are:  (i)  it  makes  possible  the  creation  of  a  centralized 
administration,  and  yet  at  the  same  time  maintains  the  in- 
dividuality of  the  constituent  companies,  together  with  the 
good  will  attaching  to  their  business;  (2)  through  the  incor- 
poration of  individual  concerns  in  the  separate  states,  it  is  able 
more  easily  to  comply  with  the  laws  of  the  various  states,  such 
as,  for  example,  a  law  that  foreign  corporations  may  not  hold 
real  estate;  and  (3)  it  is  easy  to  form,  because  it  is  necessary  to 
acquire  only  a  majority  of  the  stock  of  the  separate  companies. 

On  the  other  hand,  it  is  open  to  serious  objections:  (i)  the 
perpetuation  of  the  individual  concerns  whose  stock  is  acquired 
results  in  the  creation  of  a  complex  business  and  financial 
structure,  a  set  of  wheels  within  wheels,  that  does  not  conduce  to 
the  maximum  operating  and  financial  efiiciency;  and  (2)  in  case 
all  the  stock  of  the  constituent  concerns  is  not  acquired,  the  con- 
trol of  the  business  through  the  ownership  of  only  a  part  of  the 
stock  separates  control  from  ownership  in  large  measure,  and 
is  thus  likely  to  give  rise  to  the  manipulation  of  accounts,  and 
to  the  sacrifice  of  one  set  of  stockholders  in  the  interests  of  an- 
other, with  resulting  dissatisfaction  and  friction. 

The  advantages  of  a  trust  that  owns  the  property  outright  are: 
(i)  it  provides  a  unified  operating  unit  with  a  resulting  con- 
centration of  power  and  responsibility — under  this  type  of  trust 
it  is  possible  to  dispense  with  a  lot  of  individual  companies,  each 

1  For  an  excellent  discussion  at  greater  length,  see  Haney,  Business  Organ- 
ization and  Combination  (1915),  chs.  15-16. 


38         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

having  its  own  officials  and  organization,  and  to  substitute  there- 
for a  single  concern  dominated  by  singleness  of  purpose;  and  (2) 
by  uniting  all  the  property  in  one  concern  it  makes  the  interests 
of  each  the  interests  of  all,  and  thus  eliminates  that  "milking"  of 
one  group  by  another  which  occurs  not  uncommonly  under  the 
holding  company  device.  The  disadvantages  are:  (i)  it  sacrifices 
the  independence  of  the  separate  concerns,  and  thus  their  fran- 
chises and  firm  names;  (2)  it  can  not  accommodate  itself  so 
readily  to  local  conditions;  and  (3)  it  is  more  difficult  to  form, 
because  of  charter  and  statutory  restrictions.  Nevertheless,  as 
we  shall  see,  trusts  more  generally  took  this  form  rather  than 
the  holding  company  form. 

The  general  character  of  the  trust  movement  has  been  in- 
dicated.   There  remains  to  consider  its  extent. 

The  extent  of  the  movement  toward  combination  can  be 
statistically  stated  with  a  fair  degree  of  precision,  and  several 
such  compilations  are  available.^  A  similar  statistical  study  of 
the  trust  movement,  however,  can  not  be  made  by  an  independ- 
ent investigator;  to  secure  the  requisite  data  in  fullness  requires 
the  resources  and  authority  of  a  governmental  agency.  To  dis- 
cover and  enumerate  all  the  combinations  of  a  certain  size  (say 
capitalization)  is  easy;  but  to  determine  in  each  instance  whether 
the  combination  realized  monopoly  control  (that  is,  was  a  trust) 
is  quite  another  matter.  The  attempt  to  make  such  a  com- 
putation is  rendered  more  difficult  by  the  fact  that  a  combina- 
tion at  its  organization  may  not  possess  monopolistic  powers, 
but  subsequently  may  acquire  them.  The  National  Cordage 
Company  is  a  case  in  point.  It  has  seemed  best,  therefore,  to 
indicate  the  extent  of  the  trust  movement  by  using  the  statistics 
for  the  combination  movement,  with  a  caution  against  a  too 
literal  interpretation  of  the  figures  as  bearing  on  the  trust 
movement. 

An  excellent  statistical  study  of  the  industrial  combinations 
formed  in  the  United  States  through  1900  has  been  made  by  Mr. 

'  See,  for  example,  Conant,  Publications  of  the  American  Statistical 
Association,  7,  pp.  208-217  (March,  1901);  U.  S.  Census,  1900,  vol.  7, 
pp.  LXXXVI  seq.;  and  Moody,  The  Truth  about  the  Trusts,  pp.  453  seq. 


THE  MODERN  TRUST  MOVEMENT  39 

Luther  Conant,  subsequently  Commissioner  of  Corporations,-' 
The  following  table,  prepared  by  him,  shows  the  number  of  in- 
dustrial combinations,  with  a  capital  of  $1,000,000  or  over,  ef- 
fected from  1887  to  1900,  with  their  authorized  capitalization: 

Total  capitalization, 
Year  Number  of  combinations  stocks  and  bonds 

887 8 $216,226,000 

888 3 23,600,000 

889 12 152,179,000 

890 13 155,156,000 

891 17 166,200,000 

892 10 193,41 2,000 

893 6 239,015,000 

894 2 30,400,000 

895 6 107,255,000 

896 5 49,850,000 

897 4 81,000,000 


Total  (1S87-1897) 86 $1,414,293,000 

1898 20 $708,600,000 

1899 87 2,243,995,000 

1900 42 831,415,000 


Total  (1898-1900) 149 $3,784,010,000 

Total  (1887-1900) 235 $5,198,303,000 

During  the  eleven  years  1887-1897,  therefore,  there  were 
formed  86  industrial  combinations  with  an  authorized  capital 
of  $1,414,000,000.  Some  of  these  combinations  were  trusts 
also,  that  is,  they  exercised  monopolistic  control  over  the 
industry;  but  by  far  the  greater  number  were  simply  combina- 
tions. The  list  includes  five  brewing  companies,  each  a  combi- 
nation, but  none  of  them  a  trust;  and  the  whisky  trust  in  its 
various  forms  is  counted  three  times.  The  list  includes  the  sugar 
trust  twice,  once  as  the  Sugar  Refineries  Company,  and  again  as 
the  American  Sugar  Refining  Company.  It  includes  four  steel 
companies,  none  of  which  was  a  trust.    The  number  of  actual 

1  Publications  of  the  American  Statistical  Association,  7,  pp.  207-226 
(March,  1901). 


40        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

trusts  formed  from  1887  (the  date  of  the  formation  of  the  last 
"trust")  to  1897  is  thus  considerably  less  than  the  number  of 
combinations.  Probably  not  more  than  twenty,  or  at  most 
twenty-five,  of  these  combinations  secured  a  sufficient  control 
of  the  industry  to  be  called  trusts. 

Among  the  more  important  trusts  formed  between  1887  and 
1897  were  the  following:  National  Cordage  Company  (1887); 
American  Cotton  Oil  Company  (1889);  Diamond  Match  Com- 
pany (1889);^  American  Tobacco  Company  (1890);  Distilling 
and  Cattle  Feeding  Company  (1890);  National  Starch  Manu- 
facturing Company  (1890);  American  Sugar  Refining  Company 
(1891);  National  Wall  Paper  Company  (1892);  United  States 
Leather  Company  (1893);  American  Malting  Company  (1897); 
and  Glucose  Sugar  Refining  Company  (1897).^ 

Nearly  all  of  these  trusts  represented  combination  by  consoli- 
dation or  purchase  rather  than  by  means  of  a  holding  company. 
The  cordage,  match,  cigarette,  whisky,  starch,  sugar,  leather, 
malt,  and  glucose  trusts  were  property  owning  combinations. 
The  cotton  oil  trust,  on  the  other  hand,  was  a  holding  company. 
No  doubt  there  were  others  that  took  this  form  also,  though  the 
paucity  of  data  on  this  subject  makes  it  difficult  to  determine 
just  which  ones  they  were. 

The  real  trust  movement,  however,  dates  from  i8g8.  This 
is  indicated  by  the  statistics  for  combinations.  Reference  to  the 
table  on  page  39  shows  that  in  the  years  1898  to  1900  there 
were  formed  149  combinations,  with  a  total  capital  of  $3,784,- 
000,000.  In  three  years  almost  twice  as  many  combinations  were 
formed  as  in  the  preceding  eleven  years;  and  the  capital  of  the 
combinations  organized  during  the  shorter  period  exceeded  by 
more  than  two  and  one-half  times  the  capital  of  those  organized 
during  the  longer  period.  In  the  year  1899  alone,  when  the  trust 
movement  reached  its  climax,  more  combinations  with  a  much 
larger  aggregate  capitalization  were  formed  than  in  the  eleven 

1  This  company,  incorporated  in  Illinois,  was  a  successor  to  another 
company  of  the  same  name  incorporated  in  Connecticut  in  1880  for  the  pur- 
pose of  monopolizing  the  match  industry.    See  77  Michigan  Reports  635. 

2  Seven  of  these  eleven  trusts  were  chartered  in  New  Jersey. 


THE  MODERN  TRUST  MOVEMENT  4I 

years  from  1887  to  1897.  The  absorption  of  this  mass  of  se- 
curities proved  to  be  such  an  enormous  task  that  in  the  latter 
part  of  1899  and  in  1900  the  promoters  had  difficulty  in  induc- 
ing the  bankers  to  float  and  the  public  to  buy  new  issues.  Never- 
theless, 42  combinations  with  a  combined  capitalization  of 
$831,000,000  were  formed  in  1900, 

As  in  the  period  1887-1897,  by  far  the  greater  number  of 
these  combinations  were  simply  combinations;  they  did  not  re- 
sult in  the  formation  of  an  organization  large  enough  to  control 
the  industry.  In  the  list  of  149  combinations,  we  find,  for  ex- 
ample, seventeen  in  the  steel  industry.  Several  of  these  unques- 
tionably possessed  a  degree  of  monopoly  control  over  certain 
kinds  of  steel  products — the  American  Steel  and  Wire  Company 
of  New  Jersey,  the  American  Tin  Plate  Company,  the  National 
Tube  Company,  and  the  Shelby  Steel  Tube  Company  are  prop- 
erly designated  as  trusts.  But  just  as  clearly,  certain  other  of 
these  steel  combinations  were  in  no  sense  trusts.  This  was  true 
of  the  Empire  Steel  and  Iron  Company,  the  Republic  Iron  and 
Steel  Company,  the  Sloss-Sheffield  Steel  and  Iron  Company, 
Jones  and  Laughlin,  and  several  others;  and  was  even  true  of 
such  enormous  combinations  as  the  Federal  Steel  Company,  the 
National  Steel  Company,  and  the  Carnegie  Company,  each  a 
vigorous  competitor  of  the  others,  as  subsequent  events  well 
demonstrated.  We  also  find  in  our  list  of  combinations  nine  in 
the  liquor  trade,  in  addition  to  those  effected  prior  to  1898.  For 
the  most  part  these  were  merely  local  combinations.  In  addition 
there  were  four  tobacco  combinations,  three  brick  and  three  fer- 
tilizer combinations,  and  two  ice  and  two  biscuit  combinations. 
Most  of  these  concerns  obviously  were  not  trusts.  Though 
most  of  the  companies  promoted  from  1898  to  1900  were  simply 
combinations,  it  is  still  true  that  this  was  the  period  during 
which  the  modern  trust  movement  reached  its  height.  Some 
forty  to  fifty  of  these  combinations  achieved  a  monopolistic  posi- 
tion in  their  particular  industry;  and  this  was  approximately 
— an  approximate  statement  is  all  that  can  be  made — twice  the 
number  of  trusts  organized  during  the  preceding  eleven  years. 

Some  of  the  leading  trusts  organized  during  1898- 1900  were: 


42         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  American  Tin  Plate  Company  (1898);  Continental  Tobacco 
Company  (1898);  International  Silver  Company  (1898);  Inter- 
national Paper  Company  (1898);  American  Linseed  Company 
(1898);  Otis  Elevator  Company  (1898);  Standard  Oil  Company 
of  New  Jersey  (1899);^  United  Shoe  Machinery  Company  (1899); 
American  Steel  and  Wire  Company  of  New  Jersey  (1899); 
National  Tube  Company  (1899);  American  Bicycle  Company 
(1899);  American  Chicle  Company  (1899);  Asphalt  Company 
of  America  (1899);  National  Glass  Company  (1899);  National 
Salt  Company  (1899);  Standard  Sanitary  Manufacturing  Com- 
pany (1899);  New  England  Cotton  Yarn  Company  (1899); 
Mount  Vernon- Woodberry  Cotton  Duck  Company  (1899) ;  Amer- 
ican Sheet  Steel  Company  (1900);  Shelby  Steel  Tube  Company 
(1900);  and  American  Snuff  Company  (1900).^  By  no  means 
all  of  these  companies  retained  their  monopolistic  hold  for  any 
considerable  time,  yet  all  of  them  either  at  their  organization  or 
shortly  thereafter  exercised  monopoly  control. 

There  were  other  trusts  established  during  this  period  that 
were  so  notably  unsuccessful  that  one  hesitates  to  class  them 
with  the  above.  Among  them  were  the  following:  National 
Shear  Company  (1898);  United  States  Envelope  Company 
(1898);  American  Hide  and  Leather  Company  (1899);  and 
American  Writing  Paper  Company  (1899).  Indeed  some  of  the 
trusts  in  the  earlier  list  might  well  be  placed  in  this  group, 
particularly  the  American  Bicycle  Company,  the  National  Salt 
Company,  the  New  England  Cotton  Yarn  Company,  and  the 
Mount  Vernon- Woodberry  Cotton  Duck  Company. 

Comparatively  few  of  the  trusts  formed  between  1898  and 
1900  were  holding  companies.  The  most  striking  exception  was 
the  Standard  Oil  Company  of  New  Jersey,  which  adopted  the 
holding  company  plan  as  a  substitute  for  the  community  of 
interest  arrangement  that  had  been  in  force  since  1892,  but 
which  it  seemed  wise  to  abandon  in  1899  in  view  of  the  attacks 
being  made  upon  it  by  the  state  of  Ohio. 

*  Reorganization  as  a  holding  company. 

^  iMghteen  of  the  twenty-one  trusts  enumerated  above  were  incorporated 
in  New  Jersey. 


THE  MODERN  TRUST  MOVEMENT  43 

Even  after  1900,  when  there  was  somewhat  of  a  lull  in  the 
trust  movement,  the  formation  of  trusts  continued  on  a  large 
scale  up  to  1904.  A  table  prepared  by  Mr.  John  Moody  gives  a 
list  of  the  combinations  organized  to  1904.^  From  this  table  it 
appears  that  46  combinations  (each  with  an  outstanding  capital 
of  $1,000,000  or  over)  were  formed  in  1901;  63  in  1902;  and  18  in 
1903,  making  a  total  of  127  during  the  three  years.  If  we  note 
that  Mr.  Moody's  list  is  not  as  exhaustive  as  Mr.  Conant's,^ 
it  would  appear  that  substantially  as  many  combinations  were 
formed  during  the  three  years  from  1901  to  1903  as  during  the 
three  years  from  1S98  to  1900.  A  detailed  study  of  the  combin- 
ations organized  between  1901  and  1903,  however,  reveals  the 
fact  that  they  were  mainly  combinations  of  limited  scope;  the 
number  of  them  that  were  trusts  was  distinctly  less  than  in  the 
preceding  three-year  period.  Hardly  more  than  twenty  of  them 
were  trusts,  as  compared  with  some  forty  or  fifty  during  1898  to 
1900.  The  leading  trusts  organized  between  1900  and  1903  were: 
the  United  States  Steel  Corporation  (1901) ;  American  Can  Com- 
pany (1901);  International  Harvester  Company  (1902);  Corn 
Products  Company  (1902);  and  International  Nickel  Company 
(1902).^  During  this  period  also  a  number  of  important  re- 
organizations took  place.  The  Consolidated  Tobacco  Company 
was  formed  in  1901  to  unite,  through  the  holding  company  ar- 
rangement, the  American  Tobacco  Company  (the  cigarette 
trust)  and  the  Continental  Tobacco  Company  (the  plug  tobacco 
trust).  Other  companies  that  represented  trust  reorganizations 
of  one  kind  or  another  were:  Eastman  Kodak  Company  (1901); 
International  Salt  Company  (1901);  United  States  Cotton  Duck 
Corporation  (1901);  Distillers  Securities  Corporation  (1902); 
American  Coal  Products  Company  (1903);  General  Asphalt 
Company  (1903);  E.  I.  du  Pont  de  Nemours  Powder  Company 
(1903);  Pope  Manufacturing  Company  of  New  Jersey  (1903).^ 

^  The  Truth  about  the  Trusts,  pp.  453-467. 

2  For  example,  Mr.  Conant  inckided  all  combinations  having  an  outliorized 
capital  of  $1,000,000  or  more,  whereas  Mr.  Moody  included  only  those  hav- 
ing an  oittsland'nig  capital  of  this  amount. 

'  All  of  these  five  trusts  were  incorporated  In  New  Jersey, 

*  A  reorganization  of  the  American  Bicycle  Company. 


44         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

In  1903  a  merger  of  the  leading  meat  packers  was  proposed,  but 
it  did  not  come  to  pass.  Instead  the  National  Packing  Company 
was  organized,  and  through  it  a  community  of  interest  was 
effected,  or,  perhaps  one  should  say,  maintained. 

The  organization  of  trusts  seems  to  have  come  rather  def- 
initely to  an  end  by  the  close  of  1903.  The  stock  market  panic 
of  1903,  ascribable  to  the  large  mass  of  "undigested  securities"; 
the  popular  opposition  to  trusts  that  was  reflected  in  the  crea- 
tion of  the  Bureau  of  Corporations  in  1903;  the  Northern  Se- 
curities decision  in  1904,  casting  by  implication  grave  suspicion 
on  the  legality  of  trusts— all  combined  to  dull  the  public  appetite 
for  trust  stocks,  and  thus  to  make  their  manufacture  no  longer 
particularly  profitable.  Moreover,  by  the  close  of  1903,  most 
of  the  industries  that  were  at  all  adapted  to  monopolization, 
and  many  that  were  not,  had  been  "trustified";  and  accord- 
ingly the  period  that  followed  was  mainly  characterized  by  the 
endeavor,  often  unsuccessful,  of  the  trusts  to  hold  the  position 
they  had  gained. 

Whereas  up  to  1900  the  most  common  form  of  trust  organiza- 
tion was  a  single  corporation  owning  the  various  properties  out- 
right,^ after  1900  and  up  to  the  Northern  Securities  decision  the 
holding  company  form  vied  with  it  in  popularity.  The  steel 
trust  was  a  holding  company  trust;  the  cigarette  and  plug  to- 
bacco trusts  were  tied  together  through  a  holding  company;  and 
holding  companies  were  made  use  of  in  the  gunpowder,  whisky, 
and  meat  industries.  On  the  other  hand  the  harvester,  tin  can, 
and  glucose  trusts  took  the  property  owning  form;  and  the 
powder  trust  proceeded  to  substitute  this  form  for  the  holding 
company.  But  in  1904  the  Supreme  Court  in  the  Northern 
Securities  case  ^  held  the  combination  of  two  competing  railroads 
through  a  holding  company  to  be  illegal,  and  thereafter  the 
other  type  of  organization  came  into  renewed  favor.  In  the  to- 
bacco industry,  for  example,  there  was  straightway  formed  the 
second  American  Tobacco  Company,  which  proceeded  to  ac- 
quire the  property  of  the  concerns  formerly  controlled  by  the 

>  See  Industrial  Commission,  I,  p.  10  (Review  of  Evidence). 
2  See  p.  399. 


THE  MODERN  TRUST  MOVEMENT  45 

Consolidated  Tobacco  Company,  the  holding  company  organ- 
ized in  1901.  Yet  the  property  holding  corporation,  like  the 
holding  company,  could  not  pass  the  legal  tests,  when  entered 
into,  as  in  this  instance,  to  effect  an  illegal  object.  In  191 1  the 
Supreme  Court  held  the  tobacco  merger  illegal.  In  the  same 
year  the  Supreme  Court  adjudged  the  Standard  Oil  Company  of 
New  Jersey  illegal,  not  because  it  was  a  holding  company,  but 
because  it  had  effected  a  restraint  of  trade.  From  these  de- 
cisions it  clearly  appears  that  neither  the  holding  company  nor 
the  merger  is  legal,  when  used  to  effect  an  illegal  object. 


CHAPTER  V 
THE  STANDARD  OIL  COMPANY  ' 

Mr.  G.  H.  Montague  in  the  preface  of  his  book  "The  Rise  and 
Progress  of  the  Standard  Oil  Company"  observes  that  the  oil 
business,  in  its  early  phase,  was  the  reflex  of  prevalent  railway 
methods,  and  that  it  is  not  fair  to  attempt  to  judge  the  situation 
without  first  ascertaining  the  standards  set  by  the  rralway 
management  of  the  time.  It  does  not  fall  within  the  province  of 
this  treatment  to  judge  the  Standard  Oil  Company,  but  merely 
to  point  out  some  of  the  methods  by  which  it  acquired  its  power. 

The  first  successful  oil  well  was  drilled  at  Titusville,  Pennsyl- 
vania, in  1859.  This  great  event  was  followed  by  the  discovery 
of  other  oil  deposits,  and  by  the  rapid  development  of  the  demand 
for  refined  petroleum  products.  At  that  time  Mr.  John  D.  Rocke- 
feller, only  twenty  years  of  age,  was  engaged  in  the  produce 
commission  business  on  the  Cleveland  docks.  But  Mr.  Rocke- 
feller early  foresaw  the  possibilities  in  the  oil  business,  and  in 
1862  he  and  his  partner,  who  had  made  excellent  profits  in  the 

1  On  the  Standard  Oil  Company  see:  Report  of  the  Commissioner  of  Cor- 
porations on  the  Transportation  of  Petroleum,  May  2,  1906;  Report  of  the 
Commissioner  of  Corporations  on  the  Petroleum  Industry,  part  I,  Position  of 
the  Standard  Oil  Company  in  the  Petroleum  Industry  (Ma}'  20,  1907),  and 
part  II,  Prices  and  Profits  (August  5,  1907);  Report  of  the  Federal  Trade 
Commission  on  Pipe-Line  Transportation  of  Petroleum;  Report  of  the 
Federal  Trade  Commission  on  Price  of  Gasoline  in  1915;  Brief  for  the  United 
States,  in  two  volumes,  in  Standard  Oil  Company  v.  United  States  (no.  725); 
Brief  for  Appellants  (Standard  Oil  Company  ct  al),  in  two  volumes,  in 
Standard  Oil  Company  v.  United  States  (no.  725);  173  Fed.  Rep.  177-200; 
221  U.  S.  1-106;  House  Report  no.  3112,  soth  Cong.,  ist  Sess.;  Industrial 
Commission,  vol.  I,  pp.  261-800;  49  Ohio  State  Reports  137-189;  218  Mis- 
souri Reports  1-507;  Tarbell,  The  History  of  the  Standard  Oil  Company,  in 
two  volumes;  Lloyd,  Wealth  ;\gainst  Commonwealth;  Montague,  the  Rise 
and  Progress  of  the  Standard  Oil  Company.  (For  full  titles  see  tiie  Bibli- 
ography.) 

46 


THE  STANDARD  OIL  COAIPANY  47 

produce  business  as  the  result  of  the  unusual  demands  created  by 
the  Civil  War,  invested  $4,000  in  an  oil  refinery,  which  one 
Samuel  Andrews  was  anxious  to  start.  Mr.  Andrews  proved  to 
be  a  mechanical  genius,  and  the  little  refinery  at  Cleveland  be- 
came quite  profitable.  In  1865  Mr.  Rockefeller  disposed  of  his 
interest  in  the  commission  house,  and  entered  into  a  partnership 
with  Mr.  Andrews.  The  partnership  of  Rockefeller  and  Andrews 
associated  itself  also  with  Mr.  William  Rockefeller  in  the  firm  of 
William  Rockefeller  and  Company,  and  this  new  firm  built 
another  refinery  on  property  adjacent  to  the  works  of  Rocke- 
feller and  Andrews.  These  two  concerns  then  organized  the  firm 
of  Rockefeller  and  Company,  a  selling  agency  with  headquarters 
at  New  York  City.  IVIr.  Rockefeller  was  one  of  the  first  to  see 
that  by  producing  on  a  larger  scale  improvements  in  the  process 
of  refining  could  be  brought  about,  and  the  by-products  more 
effectively  utilized.  In  1S67,  therefore,  the  three  Rockefeller 
firms  united  with  the  firms  S.  V.  Harkness  and  H.  M.  Flagler  into 
a  new  concern  called  Rockefeller,  Andrews  and  Flagler. 

In  1870  (June)  the  Standard  Oil  Company  of  Ohio  was 
incorporated  with  a  capital  stock  of  $1,000,000.  This  company 
took  over  the  properties  of  the  partnership  to  which  it  suc- 
ceeded. The  Standard  Oil  Company  was,  even  at  this  time,  the 
largest  oil  concern  in  the  country.  It  produced  about  10  per 
cent  of  the  country's  output  of  refined  oil.^  But  it  operated  no 
refineries  outside  of  Cleveland,  was  not  engaged  in  the  production 
of  crude  oil,  and  had  as  competitors  some  250  concerns.-  By 
1879,  however,  the  Standard  Oil  Company,  according  to  the 
statement  of  its  ofiicials,  controlled  from  90  to  95  per  cent  of  the 
refining  business  of  the  country.^  By  what  means  was  a  com- 
pany occupying  such  a  modest  position  in  1870  able  so  effec- 
tively to  eliminate  its  competitors?  According  to  the  Commis- 
sioner of  Corporations,  "unquestionably,  the  most  important 
single  element  in  this  early  extension  of  the  company's  power 

'  Report  of  the  Commissioner  of  Corporations  on  the  Petroleum  Industry, 
part  I,  p.  48.    Referred  to  hereafter  as  Report  on  the  Petroleum  Industry. 
^  Report  on  the  Petroleum  Industry,  part  I,  p.  48. 
^  Report  of  Hepburn  Committee  (New  York),  pp.  2615,  2695. 


48        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

was  the  railroad  rebate. "  ^  It  is  true  that  the  progress  of  the  in- 
dustry in  the  seventies  necessitated  production  on  a  considerable 
scale,  and  that  the  refiners  who  were  not  able  to  expand  their 
operations  were  doomed  in  the  competitive  struggle.  But  the 
economies  of  large-scale  production  were  secured  by  a  consider- 
able number  of  refiners,  and  hence  the  ability  to  produce  on  a 
large  scale  does  not  explain  the  growing  preeminence  of  the 
Standard  Oil  Company — and  especially  since  advantages  in 
freight  rates  easily  more  than  offset  unusual  economies  in 
production. 

The  real  struggle  in  the  seventies,  therefore,  was  to  secure 
special  railroad  rates.  And  the  railroad  situation  was  such  that 
the  opportunities  in  this  direction  were  exceptional.  There  had 
been  rate  wars  between  the  Pennsylvania  Railroad  and  the  New 
York  Central  Railroad  as  early  as  1869,  the  year  in  which  both 
of  these  roads  secured  connection  with  Chicago.  With  the 
entrance  into  Chicago  during  the  seventies  of  other  railroads — 
notably  the  Baltimore  and  Ohio  and  the  Grand  Trunk — 
competition  among  the  railroads  for  traffic  became  still  more 
intense.  The  Standard  Oil  Company,  as  it  happened,  was  well 
situated  to  demand  special  rates  on  its  oil  traffic.  Its  refineries 
at  Cleveland  were  served  by  two  railroads  to  New  York  City — 
the  New  York  Central  and  the  Erie — and  also  had  water 
communication  to  the  East  by  way  of  the  Great  Lakes  and  the 
Erie  Canal.  If  railroad  rates  were  unsatisfactory,  there  was  this 
alternative  water  route.  The  railroads  thus  found  themselves 
compelled  to  grant  greater  and  greater  concessions  to  the 
refiners  at  Cleveland,  and  the  Standard  Oil  Company  being  the 
largest  refining  concern  naturally  received  at  least  its  share.  But 
the  Standard  Oil  Company  was  ambitious,  apparently,  to  secure 
a  still  larger  share;  and  through  the  South  Improvement  Com- 
pany scheme  was  successful  in  effecting  this  end. 

The  South  Improvement  Company  was  a  Pennsylvania 
corporation  organized  in  January,  1872,  under  a  charter  granted 
in    1870,    conferring   almost    unlimited   powers.^     The    South 

'  Report  on  the  Petroleum  Industry,  part  I,  p.  22. 
2  Ibid.,  p.  55. 


THE  STANDARD  OIL  COMPANY  49 

Improvement  Company,  which  was  backed  mainly  by  certain  re- 
finers in  Cleveland  and  Pittsburg,  was  controlled  by  the  Stand- 
ard Oil  group.  The  function  of  this  company  was  to  negotiate 
with  the  railroads  for  special  rates  in  return  for  the  privilege 
of  carrying  the  large  amount  of  traffic  at  the  disposal  of  the 
company — rates  much  lower  than  were  to  be  given  to  refiners  not 
included  in  the  South  Improvement  Company  organization. 
In  this  plan  the  company  was  highly  successful.  It  entered  into 
contracts  with  the  Pennsylvania  Railroad,  the  New  York 
Central,  and  the  Erie,  whereby  its  oil  traffic  was  to  be  divided 
among  these  three  railroads  in  certain  proportions.^  These 
contracts  specified  the  rates  on  oil  from  the  oil  fields  to  the 
refining  centers  and  to  the  seaboard,  and  expressly  provided  for 
rebates  from  these  gross  rates  on  all  oil  transported  for  the  South 
Improvement  Company.  They  further  provided  that  similar 
rebates  should  be  given  to  the  South  Improvement  Company  on 
all  oil  carried  for  other  parties.  As  is  brought  out  in  a  table  in 
the  report  of  the  Commissioner  of  Corporations,  the  rebates 
ranged  from  about  40  to  50  per  cent  of  the  gross  rates  in  the  case 
of  crude  oil,  and  from  about  25  to  45  per  cent  in  the  case  of 
refined  oil."  Moreover,  the  contracts  had  other  objectionable 
features.  They  established  very  much  higher  gross  rates  on 
refined  oil  from  points  in  the  oil  regions  than  applied  from  Cleve- 
land and  Pittsburg,  where  the  leading  concerns  in  the  South 
Improvement  Company  were  located  (the  rates  from  the  oil 
region  should  have  been  at  least  as  low,  and  perhaps  lower  than 
those  from  either  Cleveland  and  Pittsburg) ;  and  they  provided 
that  the  South  Improvement  Company  should  be  supplied 
with  duplicate  copies  of  the  waybills  of  all  oil  shipments, 
these  waybills  to  show  the  name  of  the  consignor,  the  place  of 
shipment,  the  exact  kind  and  quantity  of  product  shipped,  the 
name  of  the  consignee,  and  the  destination  of  the  shipments. 
The  South  Improvement  Company,  as  the  Commissioner  of 
Corporations   pointed   out,    was    thus    to   be   provided   with 

^  A  copy  of  the  contract  entered  into  with  the  Pennsylvania  Railroad  is  in 
House  Report  no.  31 12,  50th  Cong.,  ist  Sess.,  vol.  9,  pp.  357-361, 
2  Report  on  the  Petroleum  Industry,  part  I,  p.  56, 


50  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

complete  facilities  for  espionage   upon    the  shipments  of   its 
competitors. 

The  South  Improvement  Company  with  its  favorable  con- 
tracts thus  became  a  powerful  club,  which  might  be  used  by  the 
Standard  Oil  Company  in  the  fight  against  its  competitors.  The 
government  in  its  suit  against  the  Standard  Oil  Company 
charged  that  it  was  clearly  the  intention  of  the  South  Im- 
provement Company  to  use  these  contracts  to  force  into  the 
Standard  Oil  Company  such  refineries  as  were  wanted,  and  to 
crush  out  the  Imlance.^  This  certainly  to  a  considerable  degree 
was  the  outcome.  Within  three  months  practically  the  entire 
independent  oil  business  of  Cleveland  succumbed.  At  least 
twenty  of  the  twenty-five  independent  refineries  sold  out  to  the 
Standard.  As  a  result  the  capacity  of  the  Standard  Oil  Com- 
pany increased  from  about  1,500  barrels  of  crude  oil  a  day  to 
10,000  barrels  a  day.^  The  Standard  Oil  Company  upon  the 
completion  of  this  transaction  had  a  capacity  greater  than  that  of 
all  the  refiners  in  the  oil  creek  regions  put  together,  and  greater 
also  than  that  of  all  the  New  York  refiners.  Whereas  in  1870  it 
had  refined  about  10  per  cent  of  all  the  oil  in  the  country,  it  now 
refined  over  20  per  cent. 

The  South  Improvement  Company  contracts,  signed  on 
January  18,  1872,  went  into  effect  on  February  26.^  Naturally 
they  aroused  the  most  bitter  antagon'sm  on  the  part  of  the  inde- 
pendent oil  interests.  A  mass  meeting  was  promptly  held  at 
Titusville,  Pennsylvania,  and  an  organization  to  fight  the  South 
Improvement  Company  was  formed.  An  embargo  was  at  once 
imposed  on  the  sale  of  oil  to  the  South  Improvement  Company, 
and  committees  were  sent  to  the  legislature  of  Pennsylvania  and 
to  Congress  to  enter  protest. 

This  agitation  produced  thedesired  effect.  On  March  25, 1872, 
the  railroads  signed  a  contract  with  the  independents  that  all 
shipping  of  oil  should  hereafter  be  made  on  "a  basis  of  perfect 
equality  to  all  shippers,  producers,  and  refiners,  and  that  no 

•  Hricf  for  the  United  States  (no.   725),  vol.   I,  p.  12. 

^Tarbcll,  The  History  of  the  Standard  Oil  Company,  vol.  T,  pp.  67-68. 

3  Montague,  Rise  and  Progress  of  the  Standard  Oil  Company,  p.  28. 


THE  STANDARD  OIL  COMPANY  51 

rebates,  drawbacks,  or  other  arrangements  of  any  character 
shall  be  made  or  allowed  that  will  give  any  party  the  slightest 
difference  in  rates  or  discrimination  of  any  character  whatever."  ^ 
On  March  28  the  railroads  officially  annulled  their  contracts 
with  the  South  Improvement  Company,  and  put  into  force  a  new 
schedule  of  rates  ranging  about  40  per  cent  lower  than  those 
stipulated  in  the  contracts.  And  on  April  6,  1S72,  the  legislature 
of  Pennsylvania  deprived  the  South  Improvement  Company  of 
its  charter. 

Yet  the  Standard  Oil  Company  continued  to  receive  special 
rates.  In  1879  Mr.  H.  M.  Flagler,  Mr.  Rockefeller's  partner,  pro- 
duced, before  an  Ohio  Legislative  Committee,  contracts  showing 
that  from  the  first  of  April,  1872,  to  the  middle  of  November, 
1872,  the  Standard  Oil  Company  had  an  east-bound  rate  on  the 
New  York  Central  of  $1.25  per  barrel  of  refined  oil.  This  was  25 
cents  less  than  that  provided  for  in  the  agreement  of  March  25, 
1872,  between  the  railroads  and  the  independents.^  Other 
instances  of  rebates  in  the  seventies  are  cited  in  the  report  of  the 
Commissioner  of  Corporations.^  According  to  the  Commissioner, 
at  ahnost  every  turn  rates  were  adjusted  or  manipulated  in  favor 
of  the  Standard  Oil  Company,  and  these  favors  were  shown 
the  company  at  a  time  when  they  were  of  peculiar  value — that  is, 
when  it  was  endeavoring  to  establish  its  supremacy  in  the  oil 
industry.'*  During  this  early  period  rebates  were  given  to  inde- 
pendent shippers  also,  but  the  concessions  obtained  by  the 
Standard  Oil  interests  were  much  greater  than  those  obtained  by 
their  competitors. 

Having  acquired  the  refineries  in  its  own  district  (Cleveland), 
the  Standard  Oil  Company  proceeded  to  extend  the  sphere  of  its 
influence.  In  1S74  it  gathered  in  the  important  refineries  of 
Warden,  Frew  and  Company  of  Philadelphia,  Charles  Lockhart 
of  Pittsburg,  and  Charles  Pratt  and  Company  of  New  York. 

^  House  Report  no.  3112,  soth  Conp.,  ist  Sess.,  vol.  9,  p.  361. 
^Tarbell,  The  History  of  the  Standard  Oil  Company,  vol.  I,  p.  100.    See 
also  pp.  93-94- 

3  Report  on  the  Petroleum  Industry,  part  I,  pp.  58  ff, 
*  Ibid,  p.  66, 


52  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

The  subsequent  acquisitions  of  the  Standard  Oil  Company  were 
promoted  by  the  organization  in  1874  of  an  "aUiance"  known  as 
the  Central  Association  of  Refiners,  Mr.  John  D.  Rockefeller 
being  its  president.  This  association,  which  reminds  one  in  some 
respects  of  the  South  Improvement  Company,  included  a  large 
percentage  of  the  refining  capacity  of  the  country.  The 
association  agreement  provided  that  the  members  were  to 
operate  their  own  refineries,  but  that  the  Standard  Oil  Company 
was  empowered  to  determine  the  quantity  of  their  output,  to  buy 
all  their  crude  oil  and  to  sell  all  their  refined  oil,  and  to  negotiate 
with  the  railroads  and  pipe-lines  as  to  freight  rates. ^  It  was  thus 
a  pool,  and  one  that  was  able  to  bring  great  pressure  to  bear  on 
the  carriers.  The  formation  of  this  association  was  followed  by 
the  rapid  decline  of  the  independent  element.  Within  three  or 
four  years  practically  all  of  the  independent  refiners  in  the  oil 
regions  of  northwestern  Pennsylvania  had  either  gone  out  of 
business  or  had  sold  to  the  Standard  party.^  Simultaneously,  the 
independent  group  in  the  Pittsburg  district  was  being  rapidly 
absorbed;  between  1875  and  1877  some  twenty  independent 
plants  were  acquired  by  Standard  Oil  interests.  By  1877,  more- 
over, practically  the  entire  group  of  independent  refiners  in  Bal- 
timore had  succumbed.  As  the  result  of  these  acquisitions, 
made  possible  in  many  cases  by  pressure,  the  Standard  Oil 
Company  and  allied  interests  had  secured  by  1879,  as  noted 
above,  from  90  to  95  per  cent  of  the  refining  capacity  of  the 
country. 

The  Standard  Oil  Company  was  greatly  aided  in  this  enlarge- 
ment of  its  business  by  its  control  of  pipe-lines  for  transporting 
crude  oil  from  the  oil  wells  to  the  railroads.  The  building  of 
local  pipe-lines  in  the  oil  fields  was  begun  in  1865.  The  Standard 
Oil  Company  did  not  originate  pipe-line  transportation,  nor 
did  it  build  any  of  the  lines  laid  down  in  the  first  eight  years.^ 
But  quite  early  its  guiding  spirits  realized  the  importance  of 
getting  control  of  the  pipe-lines.    The  entrance  of  the  Standard 

>  Report  on  the  Petroleum  Industry,  part  I,  pp.  49-5°- 

2  Ibid.,  p.  50. 

'  Brief  for  the  United  States  (no.  725),  vol.  I,  pp.  45-46. 


THE  STANDARD  OIL  COMPANY  S3 

Oil  group  into  the  pipe-line  business  came  in  1873.  In  that  year 
J.  A.  Bostwick  &  Company — Mr.  Bostwick  was  affiliated  with  the 
Standard  Oil  Company — built  a  local  pipe-line  in  northwestern 
Pennsylvania.  This  concern  later  became  the  American  Trans- 
fer Company,  and  as  such  was  definitely  a  part  of  the  Standard 
organization.  In  1874  Standard  Oil  interests  secured  one-third 
of  the  stock  of  the  United  Pipe  Lines,  a  company  credited  with 
30  per  cent  of  the  pipe-line  business  of  the  Pennsylvania  oil 
fields  region.  The  United  Pipe  Lines  with  its  new  affiliations 
was  able  to  secure  favors  from  the  railroads.  It  entered  into  an 
agreement  with  the  New  York  Central  and  the  Erie,  by  which 
it  was  to  apportion  to  each  road  50  per  cent  of  its  traffic,  and  in 
return  was  to  receive  a  rebate  of  10  per  cent  on  all  its  shipments.^ 
The  other  pipe-line  systems  likewise  arrayed  themselves  with 
some  railroad.  The  Empire  Transportation  Company  allied 
itself  with  the  Pennsylvania  Railroad,  and  began  the  construc- 
tion of  oil  refineries.  The  Standard  Oil  Company,  not  welcom- 
ing competition,  and  particularly  when  backed  by  railroad 
support,  demanded,  but  without  success,  that  the  Empire  Trans- 
portation Company  give  up  its  refineries.  At  the  suggestion  of 
the  New  York  Central  and  the  Erie,  which  would  have  been  in- 
jured by  the  resulting  diversion  of  oil  traffic  to  the  Pennsylvania, 
the  Standard  Oil  Company  in  March,  1877,  ceased  shipping 
freight  over  the  Pennsylvania.  This  precipitated  a  struggle, 
which  lasted  for  six  months.  In  one  instance  the  Pennsylvania 
transported  oil  at  a  rate  that  was  8  cents  per  barrel  below  cost,^ 
and  the  Empire  Transportation  Company  sold  oil  in  the  terri- 
tory of  the  Standard  "alliance"  at  very  low  prices.  But  the 
Standard  Oil  Company  with  its  allied  railroads  proved  the 
stronger.  In  October,  1877,  the  Pennsylvania  Railroad  aban- 
doned the  struggle,  and  sold  the  Empire  Transportation  Company 
to  the  Standard  Oil  Company.  The  Pennsylvania  Railroad  and 
the  Standard  Oil  Company  then  entered  into  a  contract  whereby 
the  Standard  was  to  divide  its  traffic  among  the  Pennsylvania, 
the  New  York  Central,  the  Erie,  and  the  Baltimore  and  Ohio, 

^  ReDort  of  Hepburn  Committee  (New  York),  pp.  175,  182. 
2  House  Report  no.  31 12,  50th  Cong.,  ist  Sess.,  vol.  9,  p.  176. 


54         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

and  in  return  was  to  receive  a  rebate  of  lo  per  cent  on  all  freight 
after  May  i,  1878  (when  the  contracts  of  the  Pennsylvania 
with  its  shippers  were  to  expire).^ 

In  the  same  year  (1877)  the  Standard  Oil  Company  acquired 
the  Columbia  Conduit  Company,  the  only  important  indepen- 
dent pipe-line  remaining  in  the  oil  regions.  By  the  close  of  the 
year,  therefore,  the  Standard  Oil  interests  had  obtained  control, 
through  stock  ownership,  of  substantially  all  the  pipe-lines  in  the 
oil  region.^  Hardly  a  barrel  of  oil  could  be  brought  to  the  rail- 
roads without  the  consent  of  the  Standard  organization.  Mr. 
Rockefeller  had  begun  with  an  ambition  to  be  the  only  oil 
refiner  in  the  country,  but  he  had  found  it  necessary  in  carrying 
out  this  purpose  to  secure  control  of  the  pipe-line  system.  The 
result,  incidentally,  was  the  acquisition  of  great  power  over  the 
railroads, — power  which  was  to  assist  in  the  maintenance  of  the 
monopoly  which  he  had  succeeded  in  building  up. 

The  independents,  however,  died  hard.  To  free  themselves 
from  the  dominance  of  the  Standard  Oil  Company,  they  organ- 
ized in  November,  1878,  the  Tide  Water  Pipe  Company  to  con- 
struct a  pipe-line  from  the  oil  fields  of  northwestern  Pennsylvania 
to  the  seaboard,  a  distance  of  109  miles.^  The  oil  was  to  be 
pumped  over  the  Alleghany  Mountains.  Up  to  this  time  oil  had 
never  been  pumped  more  than  30  miles,  and  no  considerable 
elevation  had  been  overcome.  The  project  was  deemed  quite 
impracticable  both  by  the  Standard  Oil  Company  and  by  the 
railroads.  Nevertheless,  success  crowned  the  venture.  In  June, 
1879,  oil  flowed  over  the  mountains,  and  into  the  receiving  tank 
located  on  the  eastern  side.  A  new  era  in  the  oil  business  seemed 
to  be  at  hand.  Clearly  it  was  but  a  matter  of  time  before  the 
Tide  Water  Pipe  Company  would  pump  oil  into  New  York  City, 
where  there  were  a  number  of  refiners  anxious  to  free  themselves 
of  their  dependence  on  the  Standard  Oil  Company  and  the  rail- 
roads.   To  meet  this  situation  the  Standard  Oil  Company  acted 

1  Montague,  The  Rise  and  Progress  of  the  Standard  Oil  Company,  pp. 

56-59- 

2  Brief  for  the  United  States  (no.  725),  vol.  I,  p.  4^). 

STarbell,  The  History  of  the  Standard  Oil  Company,  vol.  II,  p.  4- 


THE  STANDARD  OIL  COMPANY  55 

with  its  usual  dispatch  and  skill.  The  local  pipeage  rate  was  re- 
duced by  the  Standard  pipe-lines;  and  the  through  rate  on  crude 
oil  was  reduced  by  the  railroads,  in  order  to  prevent  this  traffic 
from  being  lost  to  them, — tlie  traffic  would  no  longer  bear  the 
former  rate.  The  railroad  rate  from  the  oil  fields  to  New  York 
Harbor,  for  example,  was  reduced  from  $1.15  per  barrel  to  30 
cents. ^  The  Standard  Oil  Company  was  given  an  even  lower 
rate — 20  cents — but  in  spite  of  this  discrimination  in  its  favor  it 
remained  at  a  disadvantage.  According  to  an  estimate  of  the 
engineer  who  built  the  independent  pipe-line,  oil  could  be  piped 
to  seaboard  for  16  2/3  cents  per  barrel.^  Apparently  the  day 
of  the  railroad  as  a  long  distance  transporter  of  crude  oil  was 
past. 

The  Standard  Oil  interests,  however,  did  not  delay  action 
until  the  outcome  of  the  struggle  between  the  railroads  and  the 
long  distance  pipe-line  was  known.  Hardly  had  the  new  line 
proven  a  success,  when  the  Standard  interests  began  to  build 
pipe-lines  from  the  oil  fields  to  Bayonne,  New  Jersey,  to  Phila- 
delphia, and  to  the  inland  refining  points  at  Pittsburg,  Cleve- 
land, and  Buffalo.  To  carry  on  this  vast  program — destined  to 
make  the  Standard  Oil  Company  independent  of  the  railroads 
with  respect  to  the  transportation  of  crude  oil — the  National 
Transit  Company  was  incorporated  in  April,  1881,  with  a  capital 
of  $5,000,000.^ 

Meanwhile,  the  Standard  Oil  Company  acquired  most  of  the 
independent  refineries  about  New  York  Harbor  which  the  Tide 
Water  Pipe  Company  proposed  to  feed.**  To  protect  themselves, 
the  supporters  of  the  Tide  Water  Pipe  Company  at  once  began  to 
build  several  refineries  on  the  seaboard,  the  oil  being  stored 
pending  their  completion.    Subsequently  the  Standard  Oil  Com- 

1  Report  of  the  Commissioner  of  Corporations  on  the  Transportation  of 
Petroleum,  p.  86.  Referred  to  hereafter  as  Report  on  the  Transportation 
of  Petroleum. 

^Tarbell,  The  History  of  the  Standard  Oil  Company,  vol.  II,  p.  11. 

'  Report  on  the  Petroleum  Industry,  part  I,  p.  53.  The  United  Pipe  Lines, 
a  system  of  local  gathering  lines,  was  transferred  to  the  National  Transit 
Company — the  trunk  line  system — in  1884. 

*  Report  on  the  Petroleum  Industry,  part  I,  p.  53. 


56         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

pany  contrived  to  acquire  a  minority  of  the  company's  stock.* 
This  action,  together  with  the  determined  opposition  of  the  rail- 
roads, led  to  a  practical  surrender  on  the  part  of  the  Tide  Water 
concern,  and  an  agreement  was  reached  in  October,  1883,  by 
which  the  Tide  Water  Company  became  for  all  practical  purposes 
a  part  of  the  Standard  Oil  System."  The  Standard  Oil  Company 
and  its  ally  now  collected  practically  all  the  crude  oil  produced, 
and  independent  enterprise  was  once  more  effectually  dis- 
couraged. 

By  1879,  as  we  have  seen,  the  Standard  Oil  Company  had  at- 
tained a  position  of  supremacy  in  the  refining  industry.  In  that 
year,  as  explained  in  chapter  III,  the  first  "trust  agreement" 
was  entered  into,  an  agreement  which  was  revised  and  elaborated 
in  1882.  Ten  years  later  (in  1892)  this  agreement  was  declared 
illegal  by  the  Ohio  courts.  For  several  years  thereafter  a  com- 
munity of  interest  arrangement  was  relied  upon.  But  this  ar- 
rangement was  likewise  attacked  in  the  Ohio  courts  as  not  repre- 
senting an  honest  attempt  to  comply  with  the  order  of  the  court, 
and  hence  in  1899  a  decision  was  made  to  reorganize  in  New 
Jersey  as  a  holding  company. 

Among  the  twenty  principal  companies  comprising  the  Stand- 
dard  Oil  organization  was  the  Standard  Oil  Company  of  New 
Jersey,  with  a  capital  of  $10,000,000.  The  charter  of  this  com- 
pany was  now  amended,  and  power  obtained  to  engage  in  all 
kinds  of  mining,  manufacturing,  and  trading,  and  to  hold  stocks 
and  bonds.  On  June  14,  1899,  the  capital  stock  of  the  Stand- 
ard Oil  Company  of  New  Jersey  was  increased  to  $110,000,000 
through  the  issuance  of  $100,000,000  of  common  stock,  the  ex- 
isting $10,000,000  being  changed  into  preferred  stock.^  The  New 
Jersey  concern  proceeded  to  exchange  its  stock  for  the  stocks  of 
the  concerns  which  had  formerly  been  controlled  by  the  trustees,^ 
but  which  now,  upon  the  tardy  liquidation  of  the  trust  certifi- 

>  Report  on  the  Petroleum  Industry,  part  I,  p.  54. 
2  Ibid. 

» Ibid.,  p.  84. 

■*  A  list  of  the  companies  controlled  by  the  Standard  Oil  Company  of  New 
Jersey  is  in  Report  on  the  Petroleum  Industry,  part  I,  pp.  85  seq. 


THE  STANDARD  OIL  COMPANY  57 

cates,  were  in  the  hands  of  the  former  holders  of  the  trust 
certificates.  Through  this  process  of  exchange  the  Standard  Oil 
Company  of  New  Jersey  within  a  short  period  of  time  had  out- 
standing all  told  about  $97,250,000  of  stock;  and  this  was 
practically  the  amount  of  "trust  certificates"  issued  and  out- 
standing at  the  time  of  the  dissolution  in  1892.^  The  $10,000,000 
of  preferred  stock  of  the  Standard  Oil  Company  of  New  Jersey — 
this  preferred  stock  represented  the  total  capital  stock  of  the 
Standard  Oil  Company  prior  to  the  increase  above  noted — was 
given  the  same  privileges  of  exchange  as  applied  to  the  stocks  of 
the  other  nineteen  constituent  companies,  and  it  was  readily 
exchanged  for  common  stock  in  the  Standard  Oil  Company  of 
New  Jersey,  since  under  this  company's  amended  charter  divi- 
dends on  the  preferred  stock  were  limited  to  6  per  cent,  whereas  it 
was  practically  certain  that  the  common  stock  would  receive 
much  higher  dividends.  The  preferred  stock,  after  this  ex- 
change, was  cancelled. 

This  reorganization,  however,  was  one  in  form  only.  The 
Standard  Oil  Company  of  New  Jersey  (a  holding  company) 
became  the  owner  of  the  stocks  previously  held  by  the 
trustees;  the  trustees  (liquidating)  were  made  directors  of  the 
holding  company;  and  the  holding  company  itself  was  controlled 
by  the  same  individuals  who  had  formerly  held  a  controlling 
interest  in  the  old  trust  certificates."  The  trust  had  simply  hung 
out  a  new  sign. 

The  Standard  Oil  Company  of  New  Jersey  was  thus  princi- 
pally a  holding  company.  But  it  also  refined  and  marketed  oil 
on  its  own  account.  It  owned  the  large  refineries  at  Bayonne 
and  Constable  Hook,  New  Jersey,  and  it  operated  the  Standard 
refineries  at  Baltimore,  Maryland,  and  at  Parkersburg,  West 
Virginia.    The  refineries  directly  operated  by  the  Standard  Oil 

1  Report  on  the  Petroleum  Industry,  part  I,  p.  84.  There  was  no  watered 
stock  issued  as  the  result  of  the  reorganization  of  1899.  What  water  there 
was,  if  any,  resulted  from  the  issuance  of  the  trust  certificates  in  1882. 

2  Mr.  Rockefeller  himself  held  26.4  per  cent  of  the  stock  of  the  Standard 
Oil  Company  of  New  Jersey.  Report  on  the  Petroleum  Industry,  part  I, 
P-  95- 


58         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Company  of  New  Jersey  produced  in  1904  approximately  one- 
third  of  all  the  illuminating  oil  produced  by  the  Standard 
organization. 

The  history  of  the  Standard  Oil  Company  and  the  forms  of 
organization  adopted  by  it  have  been  briefly  outlined.  It  is  now 
proposed  to  consider  in  more  detail  the  position  attained  by  the 
Standard  Oil  Company,  and  the  principal  factors  in  its  success. 
The  treatment  will  deal  in  the  main  with  the  period  from  1904  to 
1906,  the  years  which  served  as  the  basis  for  the  reports  of  the 
Commissioner  of  Corporations. 

In  1904  illuminating  oil,  or  kerosene,  was  the  most  important 
product  derived  from  crude  oil,  both  in  quantity  and  value. 
According  to  the  United  States  Census  the  total  production  of 
refined  oil  ^  in  1904  was  27,135,094  barrels,  or  1,356,754,700  gal- 
lons. Of  this  amount  the  Standard  Oil  Company  produced  at 
plants  controlled  directly  by  it,  21,341,179  barrels,  or  78.65  per 
cent  of  the  total."  The  other  refineries  affiliated  with  it  produced 
about  2,143,100  barrels,  which,  added  to  the  Standard  Oil  output 
of  21,341,179  barrels,  made  a  total  of  23,484,279  barrels,  or 
86.55  Psr  cent  of  the  country's  output.'^  This  left  3,650,805  bar- 
rels as  the  output  of  the  remaining  concerns,  or  13.45  per  cent 
of  the  total.  But  not  all  of  this  remainder  could  properly  be 
considered  as  independent.  Some  of  the  so-called  independent 
refiners  were  unable  to  obtain  crude  oil  except  from  the  Standard 
itself.  The  Standard,  of  course,  allowed  them  only  as  much 
crude  oil  as  it  chose,  and  in  this  way  was  able  to  prevent  them 
from  extending  their  business,  and  from  becoming  really  ef- 
fective competitors.  It  appears  that  of  the  total  of  about 
3,650,000  barrels  of  refined  oil  produced  by  the  companies  not 
affiliated  with  the  Standard  Oil  Company,  some  1,160,000,  or 
nearly  one-third,   were  produced   in   refineries  dependent   for 

'  In  customary  usage  the  term  "refmed  oil"  refers  to  illuminating  oil  only, 
and  it  is  so  used  in  the  Report  of  the  Commissioner  of  Corporations. 

2  Report  on  the  Petroleum  Industry,  part  I,  p.  265. 

'  Brief  for  the  United  States  (no.  725),  vol.  I,  p.  144,  places  the  percentage 
at  87.30,  and  states  that  an  employee  of  the  Standard  Oil  Company  verified 
the  correctness  of  the  computation. 


THE  STANDARD  OIL  COMPANY  59 

their  crude  oil  mainly  or  entirely  on  the  Standard  companies.^ 
While  these  1,160,000  barrels  might  not  properly  be  treated  as 
controlled  by  the  Standard,  neither  could  they  be  denominated 
really  independent,  in  view  of  the  conditions  under  which 
these  companies  secured  their  crude  oil.  If  we  deduct  these 
1,160,000  barrels,  there  would  be  left  as  independent  approxi- 
mately 2,500,000  barrels,  or  only  a  little  over  9  per  cent  of 
the  total  production. 

The  effectiveness  of  the  competition  of  the  independents 
was  even  less  than  these  figures  would  indicate,  since  their 
total  production  was  distributed  among  a  large  number  of 
concerns.  In  1904  there  were  some  seventy-five  independent 
refiners  all  told.-  The  total  output  of  these  companies  was 
less  than  that  of  either  the  Bayonne  or  the  Philadelphia  works 
of  the  Standard  Oil  Company.  Had  the  total  independent  out- 
put been  concentrated  in  a  few  large  refineries,  competition  with 
the  Standard  Oil  Company  would  have  been  much  more  vigor- 
ous and  successful. 

The  aforementioned  statistics  relate  to  the  production  of  re- 
fined oil  in  the  United  States,  not  to  the  consumption  within 
the  United  States.  But  they  also  fairly  indicate  the  Standard's 
proportion  of  the  sales  in  this  country,  in  spite  of  the  fact  that 
some  55  per  cent  of  the  country's  output  was  then  exported,  be- 
cause the  Standard  Oil  Company's  proportion  of  the  export  bus- 
iness was  only  a  little  greater  than  its  proportion  of  the  domestic 
production.  According  to  the  report  of  the  Bureau  of  Corpora- 
tions the  Standard's  proportion  of  domestic  sales  in  1904  was  in 
the  neighborhood  of  85  per  cent.^ 

Next  in  importance  to  illuminating  oil  among  the  products 
of  crude  petroleum  were  the  naphthas  (gasoline  and  benzine) 
and  the  lubricating  oils.  But  no  statistics  were  available  show- 
ing the  quantity  of  these  products  refined  by  the  Standard 
Oil  Company.  The  Commissioner  concluded,  however,  that 
because  of  the  physical  limitations  on  varying  the  proportion 

^  Report  on  the  Petroleum  Industry,  part  I,  p.  281. 
-Ibid.,pp.  271-273. 
3  Ibid.,  p.  284. 


6o  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

of  the  different  refined  products  derived  from  crude  oil,  it  was 
safe  to  say  that  the  Standard  controlled  in  1904  at  least  four- 
fifths  of  the  country's  output  of  naphtha  and  lubricating  oil.^ 

That  the  Standard  Oil  Company  possessed  monopolistic 
power  is  evident.  What  were  the  chief  sources  of  that  power? 
The  abiHty  of  the  Standard  to  maintain  a  monopolistic  position 
was  not  the  result  of  the  exclusive  ownership  of  a  limited  nat- 
ural resource;  the  Standard  had  no  monopoly  of  the  produc- 
tion of  crude  oil,  the  raw  material.  Though  the  company  pro- 
duced large  quantities  of  crude  oil,  it  produced  but  a  small 
proportion  of  its  own  requirements.  The  total  production  of 
crude  oil  in  the  United  States  in  1905  was  approximately  135 
million  barrels,  and  of  this  amount  not  over  one-sixth  was  the 
product  of  wells  owned  by  the  Standard  Oil  Company  or  af- 
filiated concerns.^  Its  interest  in  crude  oil  production  seems 
to  have  been  greatest  in  the  Pennsylvania  and  Lima  oil  fields. 
In  1906  Standard  Oil  interests  produced  26  per  cent  of  the 
crude  oil  output  of  the  Pennsylvania  field,  and  31  per  cent  of 
the  output  of  the  Lima  field.^  In  other  fields,  however,  such  as 
the  Mid-Continent,  California,  Colorado,  and  Gulf,  its  produc- 
tion was  quite  small.^ 

There  were  at  least  two  reasons  why  the  Standard  Oil  Company 
did  not  attempt  to  monopolize  the  refining  industry  by  means  of 
the  ownership  of  the  supply  of  raw  material.  In  the  first  place, 
the  Standard  probably  obtained  its  oil  cheaper  by  buying  a 
large  part  of  it  than  it  could  have  obtained  it  by  producing  the 
entire  supply  itself.  The  highly  speculative  character  of  the  oil 
business,  like  gold  mining,  probably  caused  crude  oil  to  be  sold 
on  the  average  for  less  than  the  cost  of  production,  at  least 
during  considerable  periods  of  time.  The  Standard  therefore 
allowed  others  to  take  the  risks  of  prospecting,  and  of  opening 

1  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  282.  In  the  brief 
for  the  government  it  was  charged  that  the  Standard  with  its  affiliated 
companies  manufactured  in  1904,  82.9  per  cent  of  the  naphtha  produced  in 
the  United  States.    Brief  for  the  United  States  (no.  725),  vol.  I,  p.  144. 

2  Report  on  the  Petroleum  Industry,  part  I,  p.  8. 

3  Brief  for  the  United  States  (no.  725),  vol.  I,  p.  139. 

*  Report  on  the  Petroleum  Industry,  part  I,  pp.  118-119. 


THE  STANDARD  OIL  COMPANY  6l 

up  new  fields,  and  confined  its  efforts  in  the  line  of  crude  oil 
production  to  the  better  developed  areas.  Secondly,  and  prob- 
ably more  important,  the  Standard  was  able  to  secure  control 
of  the  crude  oil  supply  without  producing  it  itself.  The  owner- 
ship by  the  Standard  of  the  pipe-lines,  the  only  effective  means 
of  marketing  most  of  the  oil,  gave  it  just  as  complete  control  of 
the  supply  of  crude  oil  as  if  it  had  held  title  to  the  oil  fields. 
Because  of  its  control  of  the  pipe-lines,  the  Standard  in  many 
districts  was  almost  the  sole  purchaser  of  crude  oil,  and  this 
practically  enabled  it  to  fix  the  price.  In  the  Pennsylvania, 
Lima-Indiana,  and  Mid-Continent  fields — the  principal  fields 
producing  oil  suitable  for  refining — the  Standard  Oil  Company 
daily  published  the  price  that  it  would  pay  for  crude  oil,  and  this 
price  was  the  public  market  price.  Prior  to  1895  oil  had  been 
bought  and  sold  at  oil  exchanges  located  in  New  York,  Pitts- 
burg, and  Oil  City,  Pennsylvania.  But  these  exchanges  were 
discontinued  in  1895  on  account  of  an  announcement  by  the 
Standard  that  it  would  no  longer  purchase  oil  on  the  basis  of 
the  prices  established  on  the  exchanges;  and  thereafter  the 
Standard  itself  named  the  price.^ 

It  has  been  urged  on  behalf  of  the  Standard  Oil  Company 
that  its  monopoly  power  was  due  to  the  great  ability  of  its 
managers,  and  the  consequent  efiiciency  of  its  plants  and  or- 
ganization. That  the  company  all  through  its  history  has  been 
highly  efiicient  is  questioned  by  no  one.  And  yet  the  Standard 
Oil  Company  has  had  no  monopoly  of  business  ability;  it  has 
been  ability  of  the  same  high  order  that  developed  our  railroads, 
our  mineral  resources,  our  timber  lands,  and  our  industries  gen- 
erally. The  "captain  of  industry"  has  been  conspicuous  in  all 
lines  of  business.  The  Standard  Oil  officials  may  have  been 
"smarter"  than  their  fellows,  as  Mr.  W.  H.  Vanderbilt  once 
said,  but,  as  will  be  pointed  out  later,  it  was  not  their  ability 
alone  that  enabled  the  Standard  to  develop  and  maintain  its 
monopoly. 

But  if  the  Standard's  monopoly  power  may  not  be  ascribed 
primarily  to  the  efficiency  of  its  managers,  may  it  not  be  the 
^  Brief  for  the  United  States  (no.  725),  vol.  I,  p.  165. 


62  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

result  of  the  economies  of  the  trust  form  of  organization?  Did 
the  estabhshment  of  a  trust  make  it  possible  for  the  Standard  to 
produce  more  cheaply  than  its  competitors,  combined  though 
some  of  them  were,  and  was  the  Standard  able  to  retain  its  mo- 
nopoly by  the  practice  of  maintaining  such  a  low  level  of  prices 
the  country  over  that  competition  was  impossible?  This  is  a 
matter  that  deserves  more  detailed  analysis  than  has  yet  been 
given  to  it  by  any  governmental  investigating  body,  even  includ- 
ing the  Bureau  of  Corporations.  Needless  to  say,  it  is  not 
within  the  power  of  the  individual  investigator  to  secure  the  de- 
sired data.  However,  we  are  not  altogether  in  the  dark  upon  the 
question  at  issue,  since  the  Bureau  did  make  quite  an  extended 
investiit-r^ion  into  the  relative  costs  of  refining  at  the  Standard 
and  at  liie  independent  plants. 

Whatever  superiority  the  Standard  Oil  Company  possessed 
over  the  independents  in  the  refining  business  must  be  attributed, 
said  the  Bureau,  chiefly  to  one  of  two  causes:  (i)  the  possession 
of  a  considerable  number  of  plants;  (2)  the  large  size  of  its  plants. 

(i)  The  Standard  Oil  Company  with  plants  scattered  all  over 
the  country  was  able  to  reduce  transportation  charges,  i.  e.,  to 
eliminate  cross  freights.  It  could  supply  each  section  of  the 
country  from  its  nearest  plant,  and  thus  effect  a  saving  as  com- 
pared with  the  refiner  who  had  to  distribute  from  a  single  re- 
finery.^ The  Standard  Oil  Company  ini9o6  owned  or  controlled 
the  output  of  over  twenty  refineries  located  in  twelve  states, 
scattered  from  New  York  Harbor  to  San  Francisco  Bay,  and  from 
the  Great  Lakes  to  the  Gulf  of  Mexico.  No  independent  refiner, 
however,  had  more  than  three  refineries,  and  only  two  or  three 
had  more  than  one.^  The  Standard  refineries,  moreover,  were  as 
a  rule  much  nearer  the  large  consuming  centers. 

The  possession  of  a  number  of  refineries  doubtless  conferred 
an  additional  advantage  through  the  possibility  which  thus 
arose  of  comparing  the  results  at  different  plants,  and  of  carry- 
ing on  experiments  in  individual  plants  without  involving  the 

'  From  this  it  follows,  of  course,  that  the  refiner  with  a  single  plant  had 
only  a  limited  market. 

2  Report  on  the  Transportation  of  Petroleum,  p.  29, 


THE  STANDARD  OIL  COMPANY  63 

entire  volume  of  business.  There  may  also  have  been  the  pos- 
sibility of  reducing  the  cost  of  general  administration  and  of 
superintendence.  However,  the  economies  directly  attributable 
to  the  possession  of  numerous  refineries,  aside  from  the  saving  in 
cost  of  transportation,  were,  in  the  opinion  of  the  Commissioner 
of  Corporations,  by  no  means  great.^ 

(2)  The  Standard  also  had  an  advantage  over  the  independ- 
ents because  of  the  large  size  of  its  individual  plants.  In  the 
eighteen  plants  directly  controlled  by  it  the  Standard  produced, 
in  1904,  21,341,000  barrels  of  illuminating  oil,  while  the  75  or 
more  independent  plants  in  the  country  had  an  output  of  only 
about  3,650,000  barrels.  The  Standard  plants  at  Bayonne  and  at 
Philadelphia  each  produced  approximately  5,000,000  barrels,  or 
about  50  per  cent  more  than  all  the  independent  plants  put  to- 
gether. The  largest  independent  concern  in  1904  produced  only 
about  200,000  barrels  of  illuminating  oil.  After  1904  several 
independent  concerns  enlarged  their  refineries,  or  constructed  new 
ones  which  approximated  the  average  size  of  the  Standard  plants, 
yet  none  of  the  independent  plants  could  compare  in  size  with 
the  largest  Standard  plants. 

The  superiority  of  the  large  Standard  plants,  however,  was  by 
no  means  as  pronounced,  said  the  Bureau  of  Corporations,  as  the 
representatives  of  the  company  claimed.  This  superiority  would 
be  expected  to  manifest  itself  in  two  different  ways — first,  in  a 
lower  cost  per  unit  of  product;  and,  second,  in  better  yields,  i.  e., 
a  less  amount  of  waste  and  larger  proportions  of  the  more  val- 
uable products.  With  regard  to  the  first  point,  the  Bureau 
declared  that  there  was  no  great  difference  in  refining  costs  as 
between  the  plants  of  the  independents  and  the  plants  of  the 
Standard.  Data  gathered  by  the  Bureau  from  nine  independent 
refineries  (the  only  ones  whose  costs  were  closely  comparable 
with  those  of  the  Standard  refineries)  showed  operating  costs  of 
refining  ranging  from  24.91  cents  per  barrel  of  crude  to  35.53 
cents,  and  averaging  29.28  cents.-  Data  regarding  the  Standard 
Oil  Company's  refining  costs  were  collected  for  the  following  six 

^  Report  on  the  Petroleum  Industry,  part  II,  p.  650. 
2  Ibid.,  p.  653. 


64         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

plants:  Sugar  Creek,  Missouri,  and  Neodesha,  Kansas  (com- 
bined), 15.46  cents  per  barrel;  Chaison,  Texas  (Security  Oil 
Company,  an  afifiliated  concern),  27.0  cents;  Lima,  Ohio,  29.29 
cents;  Richmond,  California,  32.8  cents;  Florence,  Colorado 
(United  Oil  Company,  which  sells  its  whole  output  to  the 
Standard),  33.6  cents.^  From  an  examination  of  the  costs 
at  these  six  plants  it  appears  that,  with  the  exception 
of  the  Sugar  Creek  and  Neodesha  refineries,  the  operat- 
ing expenses  of  the  Standard  plants  were  approximately 
the  same  as  those  of  the  independents  for  which  data 
were  available;  and  the  Sugar  Creek  and  Neodesha  plants 
may  not  properly  be  compared  with  these  independent  plants, 
since  they  did  not  elaborate  by-products.-  The  Lima  plant  of 
the  Standard  was  found  to  be  most  nearly  comparable  to  the 
independent  plants  whose  costs  had  been  secured,  since  it 
carried  the  elaboration  of  by-products  to  practically  the  same 
degree  of  completeness.  The  operating  costs  of  the  Lima  plant 
were,  in  fact,  almost  exactly  the  same  as  the  average  for  the  nine 
independent  plants — 29.29  cents  as  compared  with  29.28  cents. 
It  is  possible,  said  the  Bureau,  that  some  of  the  larger  Standard 
refineries  had  slightly  lower  costs,  but  in  any  event  the  difference 
between  the  average  operating  cost  for  all  the  Standard  refiner- 
ies and  for  the  more  efBcient  independent  refineries  did  not,  at 
the  most,  exceed  one-eighth  of  a  cent  per  gallon.^ 

With  respect  to  the  yield  of  products,  satisfactory  statistical 
data  were  not  available.  It  was  known  that  some  of  the  Stand- 
ard plants  elaborated  their  by-products  more  fully  than  any 
independent  plant,  and  also  that  the  Standard  plants  on  the 
whole  secured  more  of  the  high  grade  by-products.  But  it  is  not 
probable,  the  Commissioner  maintained,  that  there  was  a  very 
great  difference  in  efficiency  with  respect  to  yields  as  between  the 
best  Standard  plants  and  the  best  independent  plants.^ 

^  Report  on  the  Petroleum  Industry,  part  II,  pp.  653-654.  The  Bureau 
did  not  secure  any  direct  information  as  to  the  costs  of  production  at  the 
Standard's  [)Iant  in  Whiting. 

^  Re[)ort  on  the  Petroleum  Industry,  part  II,  p.  654. 

*  Ibid.,  p.  655.  "  Ibid.,  p.  651. 


THE  STANDARD  OIL  COMPANY  65 

Taking  into  account  both  the  cost  of  refining  per  unit  and  the 
yield,  it  is  probably  safe  to  say,  stated  the  Commissioner,  that 
the  advantage  of  the  Standard  over  the  independent  plants  was 
not  more  than  one-fourth  of  a  cent  per  gallon  in  the  cost  of  fin- 
ished products,  and  at  the  outside  it  would  not  exceed  one-half 
of  a  cent  per  gallon.^ 

To  what  was  this  advantage  of  the  Standard  due?  Did  it 
represent  the  economies  of  the  trust  form  of  organization,  or  did 
it  result  from  the  fact  that  the  largest  plants  were  owned  by  the 
trust?  To  put  it  differently,  was  the  Standard's  low  refining  cost 
the  result  of  combination  or  of  large-scale  production?  Upon 
this  point  the  report  of  the  Bureau  returned  no  conclusive  an- 
swer, since  the  costs  at  the  large  Standard  plants  were  not  shown. 

It  is  clear  from  what  has  been  said  that  the  Standard,  in  part 
because  of  the  volume  of  its  business,  and  the  consequent  greater 
size  of  its  plants,  did  refine  somewhat  more  cheaply  than  its 
competitors.^  Yet  the  Standard  would  have  effected  a  monopoly 
through  low  production  costs  only  if  it  had  been  willing  to  charge 
prices  generally  so  low  that  the  independents  could  not  produce 
at  a  profit.  But  this  was  not  its  policy.  The  Standard,  to 
be  sure,  did  cut  prices  in  certain  localities  to  make  it  uncom- 
fortable for  its  competitors,  but  this  is  quite  different  from  a 
policy  of  low  prices  generally — a  policy  that  would  have  cut  in 
severely  on  the  Standard's  profits.  And  the  fact  that  the 
Standard  was  able  to  maintain  its  control  of  the  industry  while 
at  the  same  time  charging  prices  so  high  that  many  of  the  in- 
dependents made  ample  profits,  in  spite  of  the  difficulties  under 
which  they  labored,  must  mean  that  the  Standard  resorted  to 
other  methods  of  restraining  competition.  Beyond  question, 
says  the  Commissioner  of  Corporations,  the  dominant  position 
of  the  Standard  Oil  Company  in  the  refining  industry  was  due 
to  unfair  practices — to  abuse  of  the  control  of  pipe-lines,  to  rail- 
road discriminations,  and  to  unfair  methods  of  competition 

1  Report  on  the  Petroleum  Industry,  part  II,  p.  655. 

2  The  Standard  had  a  further  advantage  over  its  competitors  through  the 
ownership  of  pipe-lines,  but,  as  will  be  shown  later,  this  did  not  constitute  a 
legitimate  advantage. 


66  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

in  the  sale  of  the  refined  petroleum  products.^    These  practices 
will  therefore  be  considered  in  some  detail. 

Throughout  its  entire  history  the  foundation  of  the  Standard 
Oil  Company's  success  has  been  the  element  of  transportation. 
The  advantages  in  transportation  possessed  by  the  Standard 
have  been  two-fold:  those  resulting  from  its  ownership  of  pipe- 
lines for  transporting  crude  oil;  and  those  resulting  from  rail- 
road discriminations  in  the  transportation  of  the  refined  products 
of  crude  oil. 

Ownership  of  Pipe-Lines 

Most  of  the  crude  oil  produced  in  this  country,  with  the  ex- 
ception of  that  produced  in  California,  Texas,  and  Louisiana,  is 
refined  before  being  consumed.^  It  reaches  the  refineries  mainly 
by  means  of  pipe-lines.  A  net  work  of  small  pipes  gathers  the 
oil  from  the  wells,  and  except  where  the  refinery  is  quite  near 
to  the  wells,  the  oil  is  conveyed  to  the  refining  point  by  means 
of  trunk  lines,  often  of  great  length.  The  process  by  which  the 
Standard  interests  acquired  a  practical  monopoly  of  the  pipe- 
line system  has  already  been  described.  This  monopoly  it  was 
able  to  maintain.  In  1904  the  Standard  controlled  88.7  per  cent 
of  the  pipe-line  business  of  the  Pennsylvania  field,  and  93.5 
per  cent  of  that  of  the  Lima-Indiana  field. ^  There  were 
apparently  no  competing  lines  whatever  in  the  Illinois  field, 
and  up  to  1906  there  was  substantially  no  competition  in  the 
Mid-Continent  field.^ 

The  methods  employed  by  the  Standard  to  maintain  its 
monopoly  of  the  pipe-line  business  were  thoroughly  investi- 
gated by  the  Bureau  of  Corporations.  The  conclusions  of  the 
Bureau  were  substantially  as  follows:  ■'' 

(i)  The  Standard  interfered  with  the  construction  of  indc- 

^  Report  on  the  Petroleum  Industry,  part  I,  pp.  276-277. 
2  The  oil  of  these  states  is  not  =0  suitable  for  refining,  and  is  used  largely 
for  fuel  in  its  natural  condition. 

'  Brief  for  the  United  States  (no.  725),  \()1.  I,  [)p.  140-141. 

*  Ibid.,  pp.  141-142. 

*  Report  on  the  Petroleum  Industry,  part  I,  pp.  153-154. 


THE  STANDARD  OIL  COMPANY  67 

pendent  pipe-lines  in  various  ways.  Having  once  constructed 
its  own  line,  it  used  its  influence  to  prevent  the  passage  of  laws 
giving  pipe-lines  the  right  of  eminent  domain.  In  the  absence 
of  such  laws,  and  to  some  extent  even  when  they  existed,  it  was 
able  to  hinder  or  prevent  the  construction  of  independent  pipe- 
lines by  buying  up  or  securing  control  of  lands  over  which  they 
had  to  pass,  and  by  influencing  railroads  to  refuse  pipe-lines  the 
right  to  cross  their  tracks.  (2)  WTien  the  Standard  was  unable 
to  prevent  the  construction  of  independent  pipe-lines  it  sought 
to  control  them  by  acquiring  their  stock.  (3)  The  Standard 
at  times  induced  crude  oil  producers  who  were  relied  upon  to 
furnish  oil  to  independent  pipe-lines,  or  refiners  who  were  relied 
upon  to  take  the  oil,  to  refrain  from  doing  so.  This  policy  was 
frequently  accompanied  by  outright  purchase  of  the  crude-oil 
properties  or  refineries.  By  this  means  the  volume  of  business 
of  the  independent  lines  was  restricted,  and  the  cost  of  pipeage 
proportionally  increased.  (4)  The  Standard  by  the  payment  of 
premiums  for  crude  oil  produced  in  the  territory  reached  by  the 
independent  pipe-lines  made  it  difficult  for  independent  pipe 
companies  to  obtain  oil  for  transportation  over  their  lines.  Most 
of  the  independent  pipe  companies,  like  the  Standard  itself, 
purchased  practically  all  the  crude  oil  which  they  handled. 
The  payment  of  a  premium  meant  that  a  higher  price  was 
offered  for  the  crude  of  a  particular  area  than  was  offered  for 
crude  elsewhere  in  this  same  field.  By  paying  a  premium  the 
Standard  was  able  to  prevent  the  independent  pipe-lines  from 
getting  an  adequate  supply  of  oil,  or  else  to  force  them  also  to 
pay  premiums,  with  a  consequent  diminution  in  their  profits. 
Since  the  independent  pipe-lines  were  all  comparatively  small 
concerns,  reaching  only  a  limited  area,  the  Standard  by  paying 
these  premiums  in  certain  localities  greatly  reduced  their 
profits,  while  itself  sustaining  comparatively  little  loss  on  the 
entire  volume  of  its  business.  The  practice  of  paying  premiiims 
on  crude  oil  is  similar  in  principle  and  effect  to  the  practice  of 
selling  refined  products  at  a  cut  price  in  certain  markets  (local 
price  discrimination).  The  payment  of  premiums  was,  on  the 
whole,  the  most  important  of  the  unfair  practices  of  the  Stand- 


68  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

ard  in  preventing  the  development  of  competition  in  the  pipe- 
Hne  business. 

The  practices  above  enumerated  by  the  Commissioner  re- 
sulted in  legislation  dealing  with  the  situation.  In  1906  pipe- 
lines were  declared  by  the  Hepburn  Act  to  be  common  carriers. 
This  made  them  subject  to  the  provisions  of  the  law  requiring  the 
charging  of  reasonable  and  non-discriminatory  rates,  and  the  filing 
of  these  rates  with  the  Interstate  Commerce  Commission.  The 
constitutionality  of  this  law,  however,  was  disputed,  and  mean- 
while the  pipe-line  companies  controlled  by  the  Standard  ren- 
dered the  law  practically  inoperative,  according  to  the  Commis- 
sioner of  Corporations,  by  their  refusal  to  accept  the  obligations 
of  common  carriers.^  The  companies  endeavored  in  various 
ways  to  prevent  outside  shippers  from  making  an  effective  use 
of  the  Standard  pipe-lines.  We  quote  again  substantially  from 
the  report  of  the  Bureau."  (i)  Some  of  the  Standard  pipe-lines 
filed  no  tariffs  with  the  Commission,  and  refused  to  transport 
any  oil  for  others.  To  avoid  doing  so  they  sought  in  some  cases 
to  confine  their  business,  or  at  least  pretended  to  confine  it, 
within  the  boundaries  of  individual  states.  (2)  Though  some  of 
the  Standard's  pipe-lines  filed  their  rates  with  the  Commission, 
the  rates  specified  were  almost  identical  with  the  rates  of  the 
railroads  between  these  same  points.  The  rates  charged,  fur- 
thermore, were  much  in  excess  of  the  cost  of  the  service,  and 
were  thus  unreasonable.^  (3)  The  tariffs  filed  by  those  Standard 
pipe-lines  that  did  comply  with  the  law  in  this  respect  were  more 
remarkable  for  their  omissions  than  for  the  rates  which  they 
quoted.  For  example,  no  rates  were  given  to  New  York  Harbor, 
either  in  the  state  of  New  York  or  in  the  state  of  New  Jersey, 
and  no  rates  to  Baltimore,  Maryland.  These  were  points  to 
which  outside  shippers  would  very  naturally  wish  to  send 
oil.    On  the  other  hand,  numerous  rates  were  quoted  to  places 

*  Report  on  the  Petroleum  Industry,  part  I,  p.  183. 

*Ibid.,  pp.  183-191. 

'  Ibid.,  pp.  35-36.  On  the  wide  marKin  between  pipe-line  costs  and 
rates,  see  also  the  Report  of  the  Federal  Trade  Commission  on  Pipe-Line 
Transportation  of  Petroleum,  pp.  18-20, 


THE  STANDARD  OIL  COMPANY  69 

where  no  one  would  care  to  deliver  oil.  (4)  Finally,  even  when 
the  Standard  pipe-lines  did  file  tariffs  indicating  an  apparent 
willingness  to  transport  oil  for  others,  they  established  regu- 
lations that  virtually  prevented  shipments.  Most  of  the 
tariffs  filed  by  the  Standard  required  shipment  to  be  made  in 
quantities  of  not  less  than  75,000  barrels,  and  in  the  case  of 
some  of  the  lines,  300,000  barrels,  minima  so  high  as  virtually  to 
prevent  the  use  of  the  pipe-lines  by  outside  shippers. 

While  such  tactics  as  these  did  not  indicate  a  disposition  to 
comply  with  the  requirements  of  the  law,  the  Commis- 
sioner pointed  out  that  possibly  the  action  of  the  Standard 
pipe-line  companies  did  not  represent  their  finally  deter- 
mined policy.  The  act  had  just  been  passed,  and  the  Inter- 
state Commerce  Commission  had  not  yet  made  any  regulations 
with  respect  to  pipe-lines,  or  decided  any  cases  involving  their 
rates.  But  the  report  of  the  Federal  Trade  Commission  on  Pipe- 
Line  Transportation  of  Petroleum  makes  it  clear  that  obstruc- 
tionary  tactics  were  to  be  the  Standard's  determined  policy;^  that 
the  law  was  not  to  be  obeyed  until  its  constitutionality  had  been 
decided  by  the  Supreme  Court.  And  this  did  not  come  to 
pass  until  1914.  Several  years  after  the  passage  of  the  Hepburn 
Act  in  1906,  the  Interstate  Commerce  Commission  had  issued  an 
order  requiring  the  Standard  and  other  pipe-line  companies  to 
file  with  the  Commission  schedules  of  their  charges  for  the 
transportation  of  oil.^  The  defendants  brought  suit  in  the 
Commerce  Court  to  set  aside  the  order,  and  that  court  issued  a 
preliminary  injunction,  holding  the  statute  to  be  unconstitu- 
tional.^ But  in  1914  in  the  Pipe-Line  Cases  the  Supreme  Court 
fully  upheld  the  constitutionality  of  the  law.'*  The  interstate 
pipe-lines  thereupon  filed  their  rates  with  the  Commission,  but 
they  had  succeeded  in  staying  the  operation  of  the  law,  so  far  as 
they  were  concerned,  for  a  period  of  eight  years. 

The  excessive  pipe-line  rates  charged  the  independent  refiners 
were  likewise  charged  the  Standard  refining  companies.  But 
this  clearly  was  a  matter  of  indifference  to  the  Standard  organi- 

'  See  pp.  20-22.  ^  204  Fed.  Rep.  798. 

^  24  I.  C.  C.  Reports  i-ii  (June  3,  191 2).  •*  234  U.  S.  548. 


70  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

zation.  It  was  simply  a  question  of  where  the  profit  of  the 
organization  as  a  whole  was  mainly  to  be  made,  whether 
in  transportation  or  in  refining.  To  the  independent  refiner, 
however,  a  high  pipage  rate  was  a  vital  matter.  An  unreason- 
able rate  reduced  correspondingly  his  total  profits,  and  might 
cause  him  to  do  business  at  a  loss.  At  times  the  rate  on  crude 
oil  from  the  Appalachian  field  to  the  seaboard  was  more  than 
25  cents  per  barrel  higher  than  the  cost  of  transportation, 
including  in  that  cost  a  profit  of  10  per  cent  on  the  cost  of  repro- 
ducing the  pipe-lines.^  This  was  over  half  a  cent  per  gallon,  and 
half  a  cent  would  yield  a  profit  of  about  10  per  cent  on  the  invest- 
ment required  to  carry  on  the  refining  business."  It  is  clear  that 
the  opportunities  for  competition  in  the  refining  of  oil  would 
have  been  much  greater  had  the  Standard  pipe-lines  been  com- 
pelled to  carry  oil  for  others  at  a  reasonable  rate.  In  fact,  not 
only  the  prosperity,  but,  according  to  the  Federal  Trade  Com- 
mission, perhaps  even  the  existence  of  many  small  concerns  was 
dependent  on  lower  pipe-line  rates  and  reasonable  minimum 
shipments.^ 

The  control  of  the  pipe-lines  with  the  refusal  to  charge  reason- 
able rates  on  the  transportation  of  crude  oil  gave  the  Standard  a 
further  advantage  over  the  independents,  in  that  it  was  enabled 
to  locate  its  refineries  more  advantageously  than  the  independ- 
ents. Thus,  the  Standard  refineries  were  located  for  the  most 
part  near  the  centers  of  consumption,  its  two  largest  refineries 
being  on  the  Atlantic  seaboard,  and  its  third  largest  being  at 
Whiting,  Indiana  (near  Chicago).  It  was  the  low  cost  of  trans- 
porting crude  oil  by  pipe-line  that  made  it  possible  for  the  Stand- 
dard  Oil  Company  to  locate  its  refineries  so  far  from  the  oil  wells. 
On  the  other  hand,  the  high  rates  charged  on  oil  transported 
through  the  pipe-lines  forced  the  refiners  not  possessing  pipe- 
lines to  locate  their  refineries  near  the  supply  of  raw  material,  and 
to  distribute  their  refmed  products  from  such  points.  Thus, 
the  main  centers  of  independent  oil  refining  in  1906  were  in  west- 

*  R('[)ort  on  llic  Prlrok'Utn  Industry,  jKiit  I,  p.  38. 

2  Ibid. 

'  Report  on  I'ipc-Linc  'JVimsportation  of  Pctrolcuni,  p.  XXXTI. 


THE  STANDARD  OIL  COMPANY  7 1 

ern  and  northwestern  Pennsylvania,  and  northwestern  Ohio. 
There  were  only  four  independent  plants  on  the  Atlantic  coast, 
near  to  the  populous  cities  of  the  seaboard  and  to  the  export 
markets;  and  none  at  Whiting,  the  distributing  point  for  the 
western  and  southern  markets. 

The  advantage  in  locating  near  the  market  obviously  arose  out 
of  the  fact  that  the  cost  of  transporting  crude  oil  in  pipe-lines  was 
much  less  than  the  cost  of  transporting  the  refined  product  to 
market  by  rail  or  water.  Whereas  the  entire  cost  of  transporting 
crude  oil  by  pipe-line  from  the  Appalachian  field  to  the  Atlantic 
seaboard  did  not  exceed  one-fourth  of  a  cent  per  gallon,  the 
freight  rate  on  refined  oil  from  the  independent  plants  in  west- 
ern Pennsylvania  to  New  York  Harbor  was  about  one  cent  per 
gallon.^  Naturally  the  independent  refiners  preferred  to  locate 
their  plants  on  the  seaboard,  rather  than  near  the  oil  fields,  yet 
this  was  not  practicable,  since,  as  has  been  stated,  the  Standard 
pipe-lines  charged  prohibitive  rates  for  the  transportation  of 
crude  oil,  the  pipeage  rates  to  independent  shippers  being  several 
times  the  actual  cost  of  transportation  to  the  Standard  pipe- 
lines. The  independents  might  still  have  located  near  the 
centers  of  consumption  had  the  rail  rates  on  the  transportation 
of  crude  oil  been  comparatively  low,  but  this  was  not  the  case. 
Generally  speaking,  the  rail  rates  were  as  high  or  even  higher 
than  the  pipe-line  rates,  high  as  these  were.^ 

It  might  be  asked  why  the  independent  refiners  did  not  build 
pipe-lines  of  their  own,  if  the  location  of  their  refineries  near  the 
markets  was  prevented  by  the  excessive  rates  charged  by  the 
Standard  pipe-lines.  The  explanation  is  that  pipe-line  trans- 
portation for  long  distances  is  economical  only  when  the  volume 
of  traffic  is  large;  and  the  unfair  methods  of  the  Standard  had 
prevented  the  independents,  with  a  few  notable  exceptions, 
from  building  up  a  business  sufficient  to  justify  the  investment. 
The  United  States  Pipe  Line  Company  did  succeed  in  construct- 
ing a  trunk  pipe-line,  but  because  of  the  opposition  of  both  the 

^  Report  on  the  Transportation  of  Petroleum,  p.  62. 
2  Report  of  the  Federal  Trade  Commission  on  Pipe-Line  Transportation 
of  Petroleum,  pp.  22-24. 


72  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Standard  Oil  Company  and  the  railroads  it  took  it  nine  years  to 
complete  its  line  to  tidewater.  An  earlier  enterprise — The  Tide 
Water  Pipe  Company,  the  first  company  to  lay  a  pipe-line  to  the 
seaboard — was  so  harried  by  the  Standard  interests  that  it  even- 
tually capitulated.  Had  the  independents  been  left  alone,  they 
would  undoubtedly  have  much  extended  their  pipe-line  facili- 
ties. 

It  is  apparent  that  if  there  is  to  be  effective  competition  in  the 
sale  of  petroleum  products,  the  pipe-lines,  which  carry  the  crude 
oil,  must  be  open  to  all  refiners  on  equal  and  fair  terms,  both  as  to 
rates  and  facilities.  The  analogy  of  the  anthracite  railroads  and 
the  commodity  clause  would  suggest  the  desirability  of  definitely 
separating  the  ownership  of  the  pipe-lines  and  of  the  refineries. 
Whenever  a  carrier  has  a  fimancial  interest  in  reducing  the  volume 
of  traffic  offered  to  it  for  transportation  over  its  line,  it  is  only 
with  great  difficulty,  if  at  all,  that  it  can  be  forced  to  offer  satis- 
factory facilities  at  reasonable  rates  to  its  would-be  patrons.  The 
Federal  Trade  Commission,  it  may  be  observed,  has  strongly 
recommended  that  the  ownership  of  the  pipe-lines  be  segregated 
from  the  other  branches  of  the  petroleum  industry.^ 

Railroad  Discriminations 

Through  its  ownership  of  pipe-lines  the  Standard  had  an 
advantage  over  its  competitors.  In  addition,  through  railroad 
discrimination  it  was  able  to  get  its  refined  products  to  market  on 
better  terms  than  the  independents. 

In  the  petroleum  business  the  cost  of  transportation  is  a  vital 
factor.  The  importance  of  transportation  arises  out  of  the  fact 
that  the  cost  of  refining,  even  including  in  the  cost  a  reasonable 
profit  to  the  refiner,  is  very  low  as  compared  with  the  freight 
rates  on  the  transportation  of  refined  oil  to  market.  The  operat- 
ing expense  of  refining  averaged  in  1906  about  three-fourths  of  a 
cent  per  gallon.^  A  net  return  of  one-half  a  cent  per  gallon  was 
considered  an  ample  profit.^    It  follows,  therefore,  that  one  and 

'  Report  on  Price  of  Gasoline  in  191 5,  pp.  17-18. 
^  Report  on  the  Petroleum  Industry,  part  II,  p.  14. 
'  Report  on  the  Transportation  of  Petroleum,  p.  34. 


THE  STANDARD  OIL  COMPANY  73 

a  half  cents  per  gallon  provided  abundantly  for  operating  ex- 
penses and  profit.  But  this  was  less  than  the  freight  rate  on 
refined  oil  for  transportation  for  any  considerable  distance.  The 
rates  from  the  oil  regions  of  Pennsylvania  and  Ohio  to  the 
markets  of  the  middle  west  ranged,  roughly,  from  two  cents  to 
three  cents  per  gallon.^  It  is  apparent,  therefore,  that  a  com- 
paratively slight  difference  in  rates  might  enable  one  refiner  to 
sell  at  a  profit  while  his  competitor  was  losing  money.  And  in 
this  industry,  as  in  most  all  others,  it  is  the  relativity  of  rates, 
rather  than  the  amount  of  the  rates  themselves,  which  most 
concerns  the  shipper. 

Illustrations  of  railroad  discrimination  in  favor  of  the  Standard 
Oil  Company  during  the  early  years  of  its  history  have  already 
been  given.  The  present  account  deals  only  with  the  advantages 
enjoyed  by  the  Standard  at  the  time  when  the  Bureau  of  Cor- 
porations published  its  report  on  the  Transportation  of  Petro- 
leum.    To  quote  from  this  report: 

"The  general  result  of  the  investigation  [into  transportation  con- 
ditions for  the  preceding  three  or  four  years]  has  been  to  disclose 
the  existence  of  numerous  and  flagrant  discriminations  by  the 
railroads  in  behalf  of  the  Standard  Oil  Company  and  its  affiliated 
corporations.  With  comparatively  few  exceptions,  mainly  of 
other  large  concerns  in  California,  the  Standard  has  been  the  sole 
beneficiary  of  such  discriminations.  In  almost  every  section  of 
the  country  that  company  has  been  found  to  enjoy  some  unfair 
advantages  over  its  competitors,  and  some  of  these  discrimina- 
tions affect  enormous  areas. "^ 

The  discriminations  enjoyed  by  the  Standard  in  the  trans- 
portation of  oil  were  classed  in  the  report  of  the  Bureau  under 
four  heads:  (i)  secret  and  semi-secret  rates;  (2)  discriminations 
in  the  open  arrangement  of  rates;  (3)  discriminations  in  classi- 
fication and  rules  of  shipment;  (4)  discriminations  in  the  treat- 
ment of  private  tank  cars.  Data  on  the  first  two  only  will  be 
here  presented. 

(i)  Two  leading  instances  of  secret  and  semi-secret  rates 

^  Report  on  the  Transportation  of  Petroleum,  p.  34. 
2  Ibid.,  p.  I. 


74         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

may  be  cited.^  The  first  deals  with  rates  from  Whiting,  Indiana, 
into  the  South.^  The  published  tariff  from  Whiting  into  the 
South  was  made  up  of  a  rate  of  eleven  cents  per  hundred  pounds 
to  the  Ohio  river  plus  rates  of  varying  amounts  from  the 
Ohio  river  south.  This  arrangement  had  long  been  in  force, 
and  was  known  to  all  shippers.  The  Standard  Oil  Company, 
however,  shipped  its  oil  into  the  South  on  an  especially  low 
rate  applying  to  shipments  between  Dolton,  Illinois,  and  Grand 
Junction,  Tennessee.  This  rate  would  have  been  open  to  all 
shippers  had  they  known  of  its  existence;  but  they  did  not,  since 
Dolton  was  an  unimportant  junction  point  near  Chicago,  and 
the  ordinary  shipper  would  never  have  thought  of  looking  up 
the  rate  from  Dolton.  The  Standard  Oil  Company  knew  of  it, 
however,  since  it  was  made  for  its  benefit.  The  secrecy  of  the 
Dolton  rate  is  proven  by  the  fact  that  the  Chicago  and  Eastern 
Illinois,  the  road  making  the  rate,  reported  to  the  Bureau  rates 
from  Whiting  to  the  South  much  higher  than  those  which  were 
accorded  to  the  Standard  Oil  Company  on  shipments  by  way  of 
Grand  Junction.  By  means  of  this  secret  combination  of  rates 
via  Grand  Junction  the  Standard  shipped  oil  into  a  large  part 
of  the  South  at  an  average  of  one-fourth  less  than  the  published 
rate  from  Whiting,  and  approximately  one-third  less  than  the 
rates  from  competitive  refining  points  in  Ohio  and  Western 
Pennsylvania  no  farther  distant.  These  discriminatory  rates  had 
hardly  been  uncovered  by  the  Bureau  before  they  were  can- 
celled by  the  railroad.  But  meanwhile  the  business  of  the  in- 
dependents had  been  much  damaged. 

To  cite  a  second  instance,^  the  only  published  rate  on  oil  be- 
tween Whiting  and  East  St.  Louis,  Illinois,  was  the  regular  class 
rate  of  i8  cents  per  loo  pounds.  But  the  Standard,  practically 
from  the  opening  of  its  Whiting  refinery  in  1890,  had  been 
charged  only  6  cents  per  100  pounds.  The  shipments  of  the 
Standard  Oil  Company  were  very  large,  practically  its  entire 

1  For  other  instances,  see  Report  on  the  Transportation  of  Petroleum, 
pp.  8  seq. 

*  Described  in  Report  on  the  Transportation  of  Petroleum,  pp.  6-7,  12. 

*  Ibid.,  pp.  12-14. 


THE  STANDARD  OIL  COMPANY  75 

southwest  business  being  handled  from  Whiting  through  East 
St.  Louis.  The  independent  refiners  in  northern  Ohio  and 
western  Pennsylvania  were  charged  from  1 7  to  24^  cents  on 
shipments  to  East  St.  Louis,  or  from  11  to  i8J^  cents  per  100 
pounds  more  than  the  Standard  rate  to  St.  Louis  from  Whiting. 
Had  the  adjustment  of  rates  on  oil  been  on  the  same  basis  as  on 
most  other  commodities,  Whiting  would  have  enjoyed  lower 
rates  to  St.  Louis  than  would  centers  of  independent  refining, 
but  the  difference  in  favor  of  Whiting  would  not  have  been  more 
than  five  to  ten  cents,  instead  of  eleven  to  eighteen  and  a  half 
cents.  With  the  aid  of  this  six  cent  special  rate,  combined  with 
other  minor  discriminations  in  the  rates  beyond  East  St.  Louis, 
the  Standard  Oil  Company  was  enabled  to  establish  a  well-nigh 
complete  monopoly  throughout  the  southwest.  As  soon  as  this 
secret  six  cent  rate  was  uncovered  by  the  Bureau — the  railroad 
officials  admitted  it  was  secret — it  was  cancelled,  and  a  rate  of 
10  cents  per  100  pounds  was  substituted  therefor.  Yet  even  this 
10  cent  rate  was  unreasonably  favorable  to  the  Standard  plant 
at  Whiting  as  compared  with  rates  from  competing  refining 
points  to  East  St.  Louis. 

The  secret  rates  enjoyed  by  the  Standard  Oil  Company 
naturally  helped  it  to  maintain  its  monopolistic  position.  With 
the  aid  of  its  favorable  freight  rates,  the  Standard  was  able  to 
sell  oil  in  competitive  areas  at  prices  which  were  profitable  to  it, 
but  which  left  no  profit  to  its  competitors.  Upon  the  elimination 
of  the  competitors,  the  Standard  advanced  its  prices  to  several 
cents  above  the  cost  of  refining,  and  thus  made  enormous 
profits. 

(2)  Discriminations  in  the  open  arrangement  of  rates.  Almost 
as  important  as  the  secret  discriminations  in  rates  were  the  open 
discriminations.    To  quote  from  the  report  of  the  Bureau: 

"Almost  everywhere  the  rates  from  the  shipping  points  used 
exclusively,  or  almost  exclusively,  by  the  Standard  are  rela- 
tively lower  than  the  rates  from  the  shipping  points  of  its  com- 
petitors. Rates  have  been  made  low  to  let  the  Standard  into 
markets,  or  they  have  been  made  high  to  keep  its  competitors 
out  of  markets.    Trifling  differences  in  distances  are  made  an 


76         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

excuse  for  large  differences  in  rates  favorable  to  the  Standard  Oil 
Company,  while  large  differences  in  distances  are  ignored  where 
they  are  against  the  Standard.  Sometimes  connecting  roads 
prorate  on  oil — that  is,  make  through  rates  which  are  lower  than 
the  combination  of  local  rates;  sometimes  they  refuse  to  prorate; 
but  in  either  case  the  result  of  their  policy  is  to  favor  the  Stand- 
ard Oil  Company.  Different  methods  are  used  in  different 
places  and  under  different  conditions,  but  the  net  result  is  that 
from  Maine  to  California  the  general  arrangement  of  open  rates 
on  petroleum  oil  is  such  as  to  give  the  Standard  an  unreasonable 
advantage  over  its  competitors. 

The  conclusion  is  unavoidable  that  the  Standard  Oil  Com- 
pany has  had  an  important  voice  in  the  construction  of  such 
rates."! 

As  illustrating  the  favoritism  shown  the  Standard  Oil  Com- 
pany we  refer  again  to  the  rates  out  of  Whiting,  Indiana.^  The 
Whiting  refinery  was  the  Standard's  most  important  refinery 
from  the  standpoint  of  distribution  in  this  country;  it  produced 
one-third  of  all  the  refined  oil  sold  by  the  Standard  in  the  United 
States.  Into  practically  all  of  the  territory  served  by  it,  the  open 
rates  from  Whiting  were  lower  than  the  geographical  location  of 
the  plant  justified.  This  advantage  was  increased  through  the 
refusal  of  the  railroads  to  prorate  on  oil.  Prior  to  the  opening  of 
the  Whiting  refinery  the  western  railroads  had  prorated  on  ship- 
ments of  oil  from  the  eastern  refining  points  to  the  Middle  and  Far 
West,  as  they  had  on  practically  all  other  commodities.  But 
shortly  before  1890  the  railroads  discontinued  this  practice,  so 
far  as  oil  shipments  were  concerned.  This  meant  that  the  east- 
ern refiners,  in  order  to  get  into  western  markets,  had  to  pay 
the  local  rate  to  Chicago  plus  the  rate  from  Chicago  to  destina- 
tion. The  disadvantage  to  which  they  were  put  in  competi- 
tion with  the  Standard  plant  at  Whiting  was  thus  measured  by 
the  local  rate  to  Chicago,  which  amounted  to  from  twelve  to 
nineteen  and  a  half  cents  per  hundred  pounds.  Had  prorating 
arrangements  been  maintained,  this  disadvantage  would  have 
been  much  less. 

Notwithstanding  the  subsequent  cancellation  of  the  secret 

^  Report  on  the  Transportation  of  Petroleum,  pp.  20-21. 

^Described  in  Report  on  the  Transportation  of  Petroleum,  pp.  21-22, 


THE  STANDARD  OIL  COMPANY  77 

rates  to  Grand  Junction  and  other  points,  Whiting  was  still 
favored  over  independent  refining  centers  in  the  open  rates  into 
the  entire  south.  From  Whiting  into  the  south  the  rate  on  oil  was 
three  and  a  half  cents  less  than  from  Toledo,  four  cents  less  than 
from  Cleveland,  and  seven  and  a  half  cents  less  than  from  Pitts- 
burg, although  on  other  commodities  the  rates  from  all  these 
cities  were  practically  the  same  as  from  Whiting.  The  success  of 
this  policy  of  discrimination  between  refining  points  was  largely 
dependent,  of  course,  upon  the  fact  that  a  large  proportion  of  the 
Standard's  traflfic  originated  at  places  where  the  independent 
refiners  had  no  plants.  The  Standard  supplied  the  greater  part 
of  the  oil  which  it  distributed  in  the  United  States  from  its  great 
refineries  at  the  seaboard  and  near  Whiting,  and  there  were  few 
competitors  at  the  seaboard  and  none  at  Whiting. 

Unfair  Methods  of  Competition  in  the  Sale  of  the  Refined 
Petroleum  Products 

The  most  important  of  the  unfair  practices  of  the  Standard,  so 
far  as  they  relate  to  selling,  has  been  local  price  cutting,  or 
local  price  discrimination  as  it  is  generally  called.  The  prices 
charged  by  the  Standard  Oil  Company  for  petroleum  products 
have  varied  greatly  in  different  towns  according  to  the  amount 
of  competition.  This  has  been  true  of  all  petroleum  products, 
but  has  been  most  glaring  with  respect  to  illuminating  oil  and 
gasoline.  After  making  allowance  for  freight  charges,  which 
generally  form  a  considerable  part  of  gross  prices,  marked  dif- 
ferences in  prices  appeared,  not  only  between  different  states 
or  sections  of  the  country,  but  also  between  the  different  towns 
of  each  state.  These  differences  in  prices  could  sometimes  be 
explained,  in  part  at  least,  by  differences  in  production  and 
marketing  costs,  yet  in  many  cases  they  reflected  solely  the 
intensity  of  competition  encountered. 

The  fact  of  varying  prices  in  different  sections,  indicating 
local  price  discrimination,  is  shown  by  the  following  table,  giv- 
ing the  average  price  (less  freight  charges)  paid  by  retailers  for 
illuminating  oil  purchased  from  the  Standard.^ 

1  Report  on  the  Petroleum  Industry,  part  II,  p.  31. 


78 


THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 


Average  Price  of  Illxjminating  Oil/  Less  Freight,  December,  1904, 

BY  States 


North  Atlantic  Division: 


Cents 
per  gallon 


Maine 10.4 

New  Hampshire 10.3 

Vermont g .  o 

Massachusetts 9.9 

Rhode  Island g .  6 

Connecticut 8.9 

New  York 10 

New  Jersey 9 

Pennsylvania 8 

South  Atlantic  Division: 

Delaware 7.7 

Maryland  &  D.  C 9.2 

Virginia 9.7 

West  Virginia 9.0 

North  Carolina 10.3 

South  Carolina 10.8 

Georgia 11.6 

Florida 12.8 

North  Central  Division: 

Ohio 8.5 

Indiana 9.3 

Illinois 9.1 

Michigan 9.0 

Wisconsin 9.2 

Minnesota 9.6 

Iowa 10.2 

Missouri 10.9 

North  Dakota ir.i 


North  Central  Division  Cents 

(cont.) :  per  gallon 

South  Dakota 12.9 

Nebraska 10.5 

Kansas 11. 4 

South  Central  Division: 

Kentucky 9.4 

Tennessee 11. 6 

Alabama 11. 6 

Mississippi 9.8 

Louisiana 9.5 

Arkansas 13 -9 

Indian  Territory 12.5 

Oklahoma 14.0 

Texas 11. 6 

Western  Division: 

Montana 15.6 

Idaho 15.6 

Wyoming 15.6 

Colorado 16.2 

New  Mexico 13.2 

Arizona 10.7 

Utah 14.8 

Nevada 16.4 

Washington 15.7 

Oregon 15.3 

California 11. i 

Northern  California 12.4 

Southern  California 7.2 


From  this  table  it  appears  that  the  average  price  of  illumin- 
ating oil  was  lowest  in  Delaware — 7.7  cents  per  gallon — and 
highest  in  Colorado — 16.2  cents  per  gallon — not  counting  Nev- 
ada, the  quotation  for  which  represented  only  one  town.  The 
average  price  in  Colorado  was  thus  more  than  twice  the  average 

'  There  are  several  grades  of  illuminating  oil,  but  most  of  the  oil  sold  in 
this  country  is  the  second  grade  of  water-white  oil,  and  the  prices  of  illum- 
inating oil  quoted  in  the  Report  of  the  Bureau  of  Corporations  are  for  the 
most  part  the  prices  of  this  grade  of  oil. 


THE  STANDARD  OIL  COMPANY  79 

price  in  Delaware.  According  to  the  Report  of  the  Bureau  of 
Corporations  not  more  than  three  and  one-half  cents  of  the  dif- 
ference in  price  in  these  two  states  could  be  explained  by  dif- 
ferences in  producing  and  marketing  costs;  and  of  course  none 
of  the  difference  in  price  could  be  explained  by  differences  in 
freight  rates,  since  the  price  in  each  case  was  that  paid  by  the 
retailer,  less  freight  charges  from  the  Standard  refinery. 

Again,  the  prices  (freight  rates  deducted)  within  the  Missis- 
sippi basin  from  the  Northern  border  to  the  Gulf  of  Mexico 
ranged  from  8.5  cents  in  Ohio,  where  several  independent  plants 
were  located,  to  13.9  cents  in  parts  of  Arkansas.  This  territory 
was  largely  supplied  with  oil  by  the  Standard  refineries  at  Whit- 
ing, Indiana,  and  Cleveland  and  Lima,  Ohio;  and  these  refineries 
used  the  same  kind  of  crude  oil,  and  had  practically  the  same 
production  costs.  In  fact,  most  of  this  area  was  served  by  the 
Whiting  refinery  alone. 

A  very  striking  instance  of  sectional  price  variation  is  found 
on  the  Pacific  coast.  The  Standard  refined  oil  at  its  great  re- 
finery near  San  Francisco.  The  average  price  of  this  oil,  the 
freight  rate  deducted,  in  December,  1904,  was  7.2  cents  per 
gallon  in  southern  California,  and  12.4  cents  per  gallon  in 
northern  California.  The  obvious  explanation  is  that  there  were 
independent  refineries  in  southern  California.  In  Oregon,  which 
drew  its  supplies  from  the  same  source,  the  price  (freight  rate 
deducted)  averaged  15.3  cents  per  gallon,  and  in  Washington, 
15.7  cents.  The  price  in  the  northern  Pacific  states  was  thus 
more  than  twice  as  high  as  in  southern  California  for  exactly 
the  same  oil. 

The  figures  for  gasoline  show  practically  the  same  amount  of 
price  variation  between  the  several  states  and  sections  of  the 
country  as  has  been  shown  to  exist  in  the  case  of  illuminating  oil. 

Equally  significant  are  the  differences  in  prices  charged  for 
illuminating  oil  and  gasoline  in  towns  within  the  same  state. 
This  subject  is  fully  discussed  in  the  report  of  the  Bureau  of 
Corporations,  and  the  details  need  not  be  reproduced  here.^ 

1  See  Report  on  the  Petroleum  Industry,  part  II,  pp.  35-39,  480-507, 
520-522. 


8o  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Summarizing  the  data,  in  thirty-one  of  the  states  and  territories, 
the  range  between  the  highest  and  lowest  price  of  illuminating 
oil,  freight  deducted,  was  at  least  3  cents;  in  ten  states  the  range 
was  at  least  5  cents;  and  in  one  state — New  Mexico — the  highest 
price  charged  within  the  state  exceeded  by  13.2  cents  per  gallon 
the  lowest  price  charged.  In  most  cases,  according  to  the  report, 
only  a  small  part  of  these  differences  in  price  within  a  single 
state  was  attributable  to  differences  in  marketing  cost. 

With  respect  to  a  number  of  the  towns  in  which  the  price  of 
illuminating  oil  was  relatively  low,  the  Bureau  made  inquiry 
into  the  cause  thereof,  and  found  that  in  the  majority  of  cases 
these  low  prices  were  due  to  the  existence  of  active  competition. 
To  quote  from  the  report: 

"The  evidence  is,  in  fact,  absolutely  conclusive  that  the  Stand- 
ard Oil  Company  charges  altogether  excessive  prices  where 
it  meets  no  competition,  and  particularly  where  there  is  little 
likelihood  of  competitors  entering  the  field,  and  that,  on  the 
other  hand,  where  competition  is  active,  it  frequently  cuts  prices 
to  a  point  which  leaves  even  the  Standard  little  or  no  profit,  and 
which  more  often  leaves  no  profit  to  the  competitor,  whose 
costs  are  ordinarily  somewhat  higher."  • 

The  significance  of  these  differences  in  prices  appears  when  it 
is  realized  that  a  reduction  of  about  7  mills  per  gallon  in  the 
price  of  illuminating  oil  would  have  converted  a  profit  of  10  per 
cent  on  the  investment  in  refining  and  marketing  facilities  into 
an  actual  loss.^  The  differences  in  price  between  competitive 
and  noncompetitive  towns  and  areas,  even  after  making  liberal 
allowance  for  possible  differences  in  production  and  marketing 
costs,  often  amounted,  as  we  have  seen,  to  several  cents  per  gal- 
lon. How  disastrously  the  practice  of  local  price  discrimination 
affected  the  independent  refiners  must,  therefore,  be  quite 
obvious. 

In  carrying  out  its  practice  of  local  price  discrimination  the 
Standard  Oil  Company  made  frequent  use  of  bogus  independent 
concerns,   that  is,   concerns  paraded  as  independent,  yet  in 

'  Report  on  the  Petroleum  Industry,  part  II,  p.  39. 
2  Ibid.,  p.  29. 


THE  STANDARD  OIL  COMPANY  8 1 

reality  controlled  by  the  Standard.  By  means  of  these  concerns 
the  Standard  was  able  to  cut  prices  to  the  customers  of  the  in- 
dependent refiner,  without  incurring  the  additional  loss  involved 
in  a  reduction  of  prices  to  the  entire  trade  of  the  territory  affected. 
By  this  device,  also,  anti-trust  sentiment,  which  often  took  the 
form  of  a  refusal  to  buy  from  a  trust,  was  overcome.  The 
government  in  its  Brief  presented  a  list  of  63  concerns  which  had 
been  operated  by  the  Standard  as  bogus  independents.^  The 
most  extensive  of  these  companies  was  the  Republic  Oil  Com- 
pany (a  reorganization  of  the  firm  of  Scofield,  Shurmer  and 
Teagle).  The  chief  function  of  this  company,  according  to  the 
Supreme  Court  of  Missouri,  was  to  follow  up  the  business  of  the 
independent  refiners,  and  under  the  guise  of  being  an  independ- 
ent company,  and  by  means  of  rebates,  fraud,  and  deception,  to 
wage  a  most  vigorous  competition  against  them  in  all  districts 
where  they  competed  with  the  Standard  companies.  And  when, 
to  quote  the  Court,  "  the  Republic  Oil  Company  had  suflSciently 
chastised  the  independents,  and  thereby  curbed  their  desire 
and  ambition  to  increase  the  volume  of  their  business,  by 
the  reduction  of  price  of  oils  or  otherwise,  it  would  then  practi- 
cally retire  from  the  field  of  operation  and  eagerly  await  the  next 
combat  with  the  independents,  if,  perchance,  any  one  of  them 
was  so  timorous  as  to  challenge  the  monopoly  of  those  two  com- 
panies [the  Standard  Oil  Company  of  Indiana  and  the  Waters 
Pierce  Oil  Company]  by  seeking  any  portion  of  their  trade."  ^ 
The  Standard  was  able  to  conduct  this  policy  of  local  price 
cutting  with  effectiveness  because  of  the  intimate  knowledge  it 
had  of  its  competitors'  business  dealings.  This  knowledge  was 
obtained  by  the  Standard  Oil  Company  and  its  various  subsid- 
iary marketing  companies  through  a  highly  developed  system 
of  espionage  over  the  affairs  of  its  competitors.  The  desired  in- 
formation as  to  the  receipts  and  shipments  of  oil  by  competitors 
was  obtained  in  part  through  the  observations  of  its  own  staff, 
and  in  part  by  bribing  railroad  employees.^ 

*  Brief  for  the  United  States  (no.  725),  vol.  II,  pp.  520-523. 

2  218  Missouri  Reports  445. 

'  Report  on  the  Petroleum  Industry,  part  I,  p.  302;  and  part  II,  p.  58. 


82  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

The  practice  of  local  price  discrimination — a  form  of  predatory 
competition — was  greatly  facilitated  by  the  Standard's  method 
of  marketing.  The  Standard  had  largely  eliminated  the  jobbers, 
delivering  its  oil  directly  to  the  retailer  by  means  of  its  own  tank 
cars,  tank  stations,  and  tank  wagons.  This  bulk  system  of 
distribution  has  great  advantages  over  barrel  or  package  distri- 
bution. In  the  first  place  it  costs  less  to  ship  oil  in  bulk  than  in 
barrels  or  other  packages,  and  there  is  often  a  saving  in  the 
local  delivery  of  oil  from  the  railway  to  the  retailer.  And  per- 
haps more  important  is  the  fact  that  barreled  oil  is  likely  to  leak, 
to  cause  dirt,  bad  odors,  and  fire,  and  therefore  the  retail  dealer 
will  ordinarily  prefer  to  buy  oil  from  the  tank  wagon  eveii  at  a 
somewhat  higher  price.  Dealing  directly  with  the  retailer,  and 
sometimes  even  directly  with  the  consumer,  the  Standard  could 
obviously  adjust  its  prices  in  the  various  markets  in  such  a  way 
as  to  stifle  threatened  competition,  as  it  could  not  had  its 
product  been  handled  largely  through  jobbers. 

This  in  itself  excellent,  because  economical,  bulk  system  of 
distribution  further  contributed  to  the  maintenance  of  the  Stand- 
ard's monopoly,  in  that  one  tank  wagon  can  serve  a  given  town 
(if  a  small  one),  or  a  section  thereof  (if  a  large  one),  as  well  as  two 
can,  and  at  a  much  less  expense  per  unit  of  product.  This  is  be- 
cause of  the  elimination  of  a  duplicate  service.  The  result  is  that 
when  once  a  concern  has  the  facilities  for  supplying  a  given  town, 
other  concerns  naturally  hesitate  to  invade  its  territory.  They 
well  realize  that  severe  competition  may  result,  and  in  this 
competition  the  concern  with  an  established  cHentele  will  have 
the  advantage.  However,  if  the  first  concern  to  enter  the  field 
merely  does  a  local  business  it  will  not  be  able  to  prevent  compet- 
itors from  gaining  a  foothold,  unless  indeed  it  should  be  willing 
to  cut  prices  on  all  its  sales;  and  this  would  be  quite  as  costly  to 
it  as  to  its  competitors.  But  if  one  of  the  competitors  does  a 
nation-wide  business,  the  case  is  quite  different.  Thus,  the 
Standard  Oil  Company,  doing  business  throughout  the  whole 
country,  could  cut  prices  in  the  particular  localities  where  there 
was  competition,  and  could  meet  the  losses  thus  incurred  out  of 
the  profits  gathered  in  elsewhere.    A  concern  doing  business  in  a 


THE  STANDARD  OIL  COMPANY  83 

limited  territory  must  therefore  generally  succumb  in  a  test  of 
strength  with  the  Standard;  and  such  has  been  the  experience  of 
competition  in  this  industr\\ 

The  Standard  was  thus  able  to  ward  off  competition  in  the 
sale  of  the  greater  part  of  its  product.  However  tempting  the 
prices,  independents  hesitated  to  enter  Standard  markets.  They 
could  compete  successfully  only  if  able  to  establish  tank  sta- 
tions and  tank  wagon  delivery  on  a  large  enough  scale  to  reduce 
the  cost  per  unit  of  product  to  a  reasonable  figure;  and  they  had 
learned  by  bitter  experience  that  if  they  made  the  venture  the 
Standard  was  likely  to  cut  prices  below  the  cost  of  production 
and  delivery.  They  realized  that  the  Standard  could  afford  this 
interminably,  if  the  price  cutting  was  sufficiently  localized,  and 
that  they  could  not.  It  is  obvious  that  only  a  concern  which  had 
strong  financial  backing,  and  which  sold  oil  in  most  of  the  leading 
markets  of  the  country^,  could  save  itself  from  the  disastrous 
effects  of  the  practice  of  price  discrimination,  and  compel  the 
Standard,  if  that  company  should  determine  to  put  prices  below 
cost,  to  accept  losses  as  great  as  its  own.  And  no  concern  had 
been  able  during  the  period  down  to  the  dissolution  of  the  Stand- 
ard Oil  Company  in  191 1  to  develop  a  business  of  such  a  size. 
The  Standard  had  been  able  to  keep  competition  localized  and 
scattered,  and  thus  subject  to  its  control.  The  wonder  is,  indeed, 
that  competition  was  not  entirely  destroyed,  unless  perchance 
this  was  not  desired  by  the  Standard  from  a  fear  of  drastic 
governmental  action. 

We  have  noted  the  monopolistic  position  of  the  Standard  Oil 
Company,  and  have  seen  by  what  means  it  achieved  and  main- 
tained this  position.  How  has  the  consumer  fared  at  the  hands 
of  this  organization?    What  has  been  the  course  of  prices? 

The  claim  has  been  made  that  reviewing  the  history  of  the  oil 
industry  as  a  whole,  the  Standard  has  reduced  prices,  and  thus 
has  benefited  the  consumer;  that  because  of  its  remarkable 
efficiency  and  the  concentration  of  the  business  in  the  hands  of  a 
trust  the  Standard  has  charged  prices  lower  than  would  have 
prevailed  under  a  competitive  regime. 

Satisfactory  data  showing  the  course  of  prices  of  petroleum 


84 


THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 


products  in  the  United  States  could  not  be  obtained  except  for 
comparatively  recent  years.  This  was  because  the  Standard  for 
many  years  had  sold  its  oil  for  the  most  part  directly  to  retail- 
ers, and  it  was  impossible  to  obtain  from  retail  dealers,  except 
during  recent  years,  sufficient  returns  to  show  the  true  price 
movement.  However,  an  idea  of  the  general  movement  of 
illuminating  oil  prices  in  this  country  can  be  gained  by  a  study  of 
export  prices,  though  these  export  prices  must  be  used  with 
caution.  The  table  below  shows  the  movement  of  export  prices 
from  1866-1905. 

Average  Price  of  Pennsylvania  Crude  at  Wells  and  Average  Price 
OF  Export  Illuminating  Oil  in  Barrels  at  New  York,  wrra 
Margin  between  Them,  1866-1905  ^ 

(Cents  per  gallon) 


Year 


Pennsylvania 

Export  oil 

crude 

in  barrels 

6.33 

30.08 

4.16 

20 

75 

6.13 

21 

16 

10.02 

24 

59 

8.08 

22 

96 

938 

21 

69 

7.92 

20 

97 

3-75 

15 

71 

2.63 

II 

65 

2.60 

11 

39 

S-5I 

17 

22 

S-43 

14 

71 

2.78 

10 

75 

2.04 

8 

09 

2.24 

9 

15 

2.03 

8 

07 

1.87 

7 

42 

Margin 


1866 
1867 
1868 
1869 
1870 
1871 
1872 
1873 
1874 
1875 
1876 

1877 
1878 

1879 
1880 
1881 


23 

75 

16 

59 

15 

03 

14 

57 

14 

88 

12 

31 

13 

05 

II 

96 

9 

02 

8 

79 

II 

71 

9 

28 

7 

97 

6 

05 

6 

91 

6 

04 

5 

55 

'  Report  on  the  Petroleum  Industry,  part  IT,  p.  49.  The  prices  from 
1866-1878  have  been  reduced  to  a  gold  basis.  The  export  prices  are  for  oil  in 
barrels,  and  though  there  has  been  some  fluctuation  in  the  price  of  barrels 
independent  of  that  of  oil,  nevertheless  the  figures  show  approximately  the 
price  of  oil  itself. 


Ttt£  STANDARD  OIL  COMPANY 


85 


Average  Price  of  Pennsylvania  Crude  at  Wells — Continued 
(Cents  per  gallon) 


Year 


1886. 


1889. 
1890. 
1891. 
1892. 
1893. 
1894. 

1895- 
1896. 
1897. 
1898. 
1899. 

I9CX3. 

1901 . 
1902. 

1903- 
1904. 

1905- 


Pennsylvania 
crude 

Export  oil 
in  barrels 

Margin 

2.52 

8.13 

S.6i 

2.00 

8 

29 

6 

29 

2. II 

8 

09 

S 

98 

1.70 

7 

II 

S 

41 

1-59 

6 

73 

5 

14 

2.07 

7 

49 

5 

42 

2.19 

7 

12 

4 

93 

2.06 

7 

31 

S 

25 

1-59 

6 

93 

5 

34 

1.32 

6 

07 

4 

75 

1-52 

5 

23 

3 

71 

1.99 

5 

19 

3 

20 

3-i8 

7 

36 

4 

18 

2.84 

6 

97 

4 

13 

1.87 

5 

91 

4 

04 

2.16 

6 

32 

4 

16 

3  10 

7 

98 

4 

88 

3.22 

8 

46 

5 

24 

2.88 

7 

SI 

4 

63 

2-95 

7 

38 

4 

43 

3-78 

8 

69 

4 

91 

3.87 

8 

30 

4 

43 

3-32 

7 

22 

3 

90 

From  an  examination  of  this  table  it  appears  that  the  margin 
between  crude  and  refined  oil  declined  almost  steadily  from  23.75 
cents  per  gallon  in  1866  to  11.96  cents  in  1873.  Prior  to  1874  the 
oil  industry  was  a  highly  competitive  one,  and  obviously  no  one 
concern  could  claim  the  credit  for  the  reduction  in  the  margin. 
The  decline  in  the  margin  between  1866  and  1873,  it  should  be 
noted,  exceeded  the  total  decline  since  1873.  This  great  de- 
cline in  the  margin  under  a  competitive  regime — a  decline 
due  largely  to  a  reduction  in  the  cost  of  production — would 
appear  to  foreshadow  a  still  further  reduction  in  costs  and 
in  the  margin,  trust  or  no  trust,  though  not  in  all  probability 
at  so  rapid  a  rate  as  during  the  earlier  period.     Again,  it 


86  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

should  be  noted  that  most  of  the  decHne  in  the  margin  which 
took  place  after  1873  had  come  by  1879.  By  this  time  the 
Standard  had  obtained  its  monopolistic  control  of  the  in- 
dustry. The  margin  had  been  11.96  cents  in  1873;  in  1879  it 
was  6.05  cents.  This  reduction  in  the  margin  from  1 874-1 879 
was  the  result  in  large  measure  of  a  decline  in  transportation 
costs.  The  rate  on  illuminating  oil  from  the  Pennsylvania  fields 
to  New  York,  which  had  been  4  cents  per  gallon  in  1874,  fell  in 
1879,  when  rates  were  being  slashed,  as  low  as  i  cent  per  gallon.^ 
The  building  of  pipe-lines  to  the  seaboard  likewise  reduced  the 
cost  of  transportation,  yet,  as  has  been  noted  above,  the  Stand- 
ard did  not  originate  trunk  pipe-lines;  in  fact,  it  first  learned 
through  the  successful  experiment  of  the  Tide  Water  Pipe  Com- 
pany that  this  means  of  transportation  was  feasible.  The  con- 
clusion of  the  Bureau  with  respect  to  the  history  of  prices  to  1879 
is  that  the  remarkable  decHne  in  the  margin  between  crude  oil 
and  refined  oil  was  chiefly,  if  not  wholly,  due  to  natural  or  exter- 
nal causes,  quite  independent  of  any  special  influence  of  the 
Standard  Oil  Company.-  The  Standard,  in  its  opinion,  could 
claim  httle,  if  any,  credit  for  the  reduction. 

The  reduction  in  the  margin  since  1879  has  been  noteworthy, 
yet  it  has  been  by  no  means  as  great  as  prior  to  1879.  In  1879 
the  margin  was  6.05  cents  per  gallon;  in  1905  it  was  3.90  cents, 
though  the  average  for  the  last  five  years  shown  in  the  table  was 
as  high  as  4.46  cents.  It  should  be  clear  that  the  Standard  was 
not  responsible  for  all  of  this  limited  reduction  in  the  margin. 
Progress  in  the  industry  was  only  to  be  expected,  combination 
or  no  combination.  Furthermore,  the  export  prices  during  the 
period  under  consideration  were  not  an  accurate  measure  of  the 
domestic  prices;  domestic  prices  rose  much  more  rapidly  than 
export  prices.  The  average  margin  between  the  quoted  price  of 
water-white  oil  in  barrels  to  jobbers  at  New  York,  and  the  price 
of  Pennsylvania  crude  in  1882  (the  first  available  year),  was  9.2 
cents  per  gallon,  while  in  1903  it  was  as  high  as  10.  i  cents  per  gal- 
lon; in  1904  it  was  9.8  cents;  and  in  1905  it  was  9.3  cents.^    This 

^  Report  on  the  Petroleum  Industry,  part  II,  p.  50.  ^  Ibid. 

3  Ibid.,  p.  51. 


THE  STANDARD  OIL  COMPANY  87 

indicates  an  actual  advance  in  the  domestic  margin  since  1882, 
but  the  value  of  the  barrels  had  increased  also,  so  that  an  exact 
comparison  between  the  two  periods  can  not  be  made. 

Such  slight  reduction  as  has  taken  place  in  the  margin  since 
the  early  eighties  has  been  counterbalanced,  moreover,  by  an 
increase  in  the  quantity  and  value  of  the  by-products  obtained. 
That  is  to  say,  because  of  the  increase  in  the  value  of  the  by- 
products the  margin  should  have  declined  even  more  than  it  did. 
While  the  Standard  has  undoubtedly  effected  greater  improve- 
ments in  the  utilization  of  by-products  than  have  its  competi- 
tors, to  attribute  all  the  improvements  to  the  Standard  is,  ac- 
cording to  the  Commissioner,  wholly  inconsistent  with  the  facts 
and  out  of  accord  with  the  history  of  improvements  in  indus- 
tries in  which  competition  has  been  active.^  It  is  certain,  says 
the  Commissioner,  that  under  free  competition,  there  would 
have  been  a  sufficient  increase  in  the  value  of  by-products  to 
permit  a  greater  reduction  of  the  margin  between  crude  and 
illuminating  oil  than  the  Standard  made.  To  quote  from  the  re- 
port of  the  Bureau  of  Corporations,  ''the  Standard  has  consis- 
tently used  its  power  to  raise  the  price  of  oil  during  the  last  ten 
years,  not  only  absolutely  but  also  relatively  to  the  cost  of  crude 
oil. "  2 

From  this  brief  analysis  of  prices,  it  would  appear  that  the 
Standard  Oil  Company  has  showed  as  little  consideration  for  the 
consumer  as  for  its  competitors.  This  conclusion  is  reenforced 
by  an  examination  of  the  profits  obtained  by  the  Standard  or- 
ganization. 

The  profits  of  the  Standard  Oil  Company  have  been  enormous, 
both  in  amount  and  in  proportion  to  the  investment  of  the  com- 
pany. This  becomes  apparent  upon  an  examination  of  the 
table  on  page  88. 

^  Report  on  the  Petroleum  Industry,  part  II,  p.  51. 
2  Ibid.,  p.  XXX. 


88 


THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 


Dividends  and  Profits  of  the  Standard  Oil  Trust  (1882-1899)  and 
OF  THE  Standard  Oil  Company  (1899-1906)  ^ 


Trust 

certificates 

Per  cent 

Per  cent 

or  capital 

of 
dividends. 

Net 

of  net 

of  net 

stock 

Rate  of 

earnings. 

earnings 

earnings 

Year 

at  end  of 

dividends 

000 

to 

to 

year. 

omitted 

omitted 

capital 

mean  net 

000 

stock 

assets 

omitted 

1882 

$71,116 

s  3,695 

525 

$12,388 

17.4 

20.5 

1883 

71,730 

4,268 

6.00 

11,231 

15 

7 

16.3 

1884 

71,230 

4,288 

6.00 

7,77s 

10 

9 

10.5 

1885 

71,230 

7,479 

10.50 

8,382 

11 

8 

II  .0 

1886 

73,355 

7,226 

10.00 

15,350 

20 

9 

18.7 

1887 

90,187 

8,463^ 

10.00 

14,026 

15 

6 

15-5 

1888 

90,293 

10,236 

11.50 

12,757 

14 

I 

133 

1889 

90,344 

10,620 

12.00 

14,845 

16 

4 

150 

1890 

96,941 

11,200 

12.00 

19,131 

19 

7 

17.6 

1891 

97,219 

11,648 

12.00 

16,331 

16 

8 

13.8 

1892 

97,250 

11,874 

12.21 

19,174 

19 

7 

154 

1893 

97,250 

11,670 

12.00 

15,457 

15 

9 

11.9 

1894 

97,250 

11,670 

12.00 

15,544 

16 

0 

11.6 

1895 

97,250 

16,532 

17.00 

24,078 

24 

8 

173 

1896 

97,250 

30,147 

31.00 

34,077 

35 

0 

23s 

1897 

97,250 

32,092 

33- 00 

47,443' 

48 

8 

27.6 

1898 

97,250 

29,175 

30.00 

47,443' 

48 

8 

27.6 

1899 

97,250 

32,092 

33  00 

47,443' 

48 

8 

27.6 

19C0 

97,448 

46,691 

48.00 

55,501 

57 

0 

27.6 

1901 

97,448 

46,775 

48.00 

52,291 

53 

7 

25  I 

1902 

97,448 

43,851 

45  00 

64,613 

66 

3 

29.2 

1903 

97,448 

42,877 

44.00 

81,336 

83 

5 

32.4 

1904 

98,338 

35,188 

36.00 

61,570 

62 

6 

21.7 

1905 

98,338 

39,335 

40.00 

57,459 

58 

4 

18.7 

1906 

98,338 

39,335 

40.00 

83,122 

84 

5 

24.6 

^  Brief  for  the  United  States  (no.  725),  vol.  I,  p.  6,  and  vol.  II,  pp.  8-9; 
and  Report  on  the  Petroleum  Industry,  part  II,  pp.  39-40. 

'^  Also  stock  dividend  of  20  per  cent,  amounting  to  $15,028,200. 

^  There  are  no  data  by  which  to  show  the  earnings  of  these  three  years 
separately;  the  figures  here  given  show,  with  substantial  accuracy,  the 
average  for  the  three  years,  1897-1899.  Brief  for  the  United  States  (no, 
725),  vol.  II,  p.  8, 


THE  STANDARD  OIL  COMPANY  89 

The  Standard  Oil  Company  thus  paid  out  in  dividends  during 
1882  to  1906  the  sum  of  $548,436,446,  an  average  of  24  per 
cent  per  year.  For  the  ten  years  ending  in  1906,  the  dividends 
ranged  from  30  per  cent  to  48  per  cent,  and  averaged  39.7  per 
cent.  Furthermore,  a  large  part  of  the  profits  was  not  distrib- 
uted to  stockholders,  but  was  put  back  into  the  business.  The 
total  net  earnings  from  1882-1906  amounted  to  $838,783,783, 
exceeding  the  dividends  by  $290,347,337.  During  the  ten  years 
ending  in  1906,  the  ratio  of  net  earnings  to  capital  ranged  from 
48.8  per  cent  to  84.5  per  cent,  the  average  for  the  ten  year  period 
being  over  61  per  cent. 

The  rate  of  dividends  and  of  net  earnings  becomes  even 
larger,  moreover,  if  applied,  not  to  the  capital  stock,  but  to  the 
actual  investment  in  the  business,  exclusive  of  the  reinvestment 
of  surplus  earnings.  This  investment,  determined  by  adding  to 
the  appraised  value  of  the  properties  in  1882  ($55,710,698)  the 
sums  invested  since  1882,  amounted  in  1906  to  $69,024,480.^  Of 
course,  the  value  of  the  property  held  by  the  Standard  in  1906 
much  exceeded  this  figure,  but  this  excess  value  came  from  the 
building  up  of  the  property  through  the  reinvestment  of  the 
surplus  earnings.  Tested  by  the  investment  basis,  the  Standard 
Oil  Company,  with  a  capitalization  in  1906  of  $98,338,382,  was 
overcapitalized  by  about  $30,000,000;  that  is,  its  stock  was 
watered  to  that  extent. 

The  objection  may  be  made  that  the  rate  of  profit  on  the 
actual  investment  is  not  a  fair  basis  of  analysis;  that  a  fairer 
basis  is  the  ratio  of  dividends  and  net  earnings  to  the  value  of  the 
company's  property,  i.  e.,  to  its  net  assets.  There  has,  therefore, 
been  included  in  the  table  a  column  showing  the  per  cent  of  the 
net  earnings  to  the  mean  net  assets.  Naturally  these  figures  are 
more  favorable  to  the  Standard,  yet  even  these  figures  show 
how  profitable  the  prices  charged  by  the  Standard  have  been. 
The  net  earnings  of  the  Standard  for  the  ten  years  ending  in 
1906  averaged  over  25  per  cent  on  the  company's  net  assets. 
It  is  not  necessary  to  discuss  the  argument  that  prices  are 
reasonable  when  they  return  only  a  fair  profit  on  the  value  of  the 
^  Brief  for  the  United  States  (no.  725),  vol.  II,  pp.  4-5. 


Qo         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

property,  even  including  in  that  value  the  property  which  was 
acquired  out  of  surplus  earnings.  It  is  not  necessary  because 
viewed  from  any  standpoint  it  is  manifest  that  the  Bureau  of 
Corporations  spoke  truly  when  it  said  that  "the  domestic 
consumer  has  been  compelled  to  pay  an  exorbitant  tribute  to 
the  oil  monopoly. "  ^ 

It  is  apparent  that  the  profits  of  the  Standard  Oil  Company 
have  been  enormous.  For  the  ten  years  ending  in  1906  these 
profits  averaged  almost  $60,000,000  per  year,  while  the  divi- 
dends averaged  nearly  $40,000,000  per  year.  The  $20,000,000 
of  undivided  profits  were  ample  to  provide  for  any  extension 
of  plant.  Much  of  the  $40,000,000  in  dividends  therefore 
went  into  other  industries — ^naturally  into  those  alUed  with  the 
oil  industry.  Inasmuch  as  all  industries  depend  on  transporta- 
tion and  as  the  railroads  are  large  buyers  of  oil  products,  inti- 
mate affiliations  with  the  railroad  companies  were  well  worth 
cultivating.  We  find,  therefore,  that  the  Standard  Oil  capi- 
talists became  large  shareholders  in  railroad  companies.  We 
find  also  that  the  Standard  Oil  interests  went  into  the  gas  and  the 
electric  lighting  businesses.  The  Consolidated  Gas  Company 
of  New  York  City,  for  example,  was  once,  if  not  still,  a  Standard 
Oil  affair.  We  find  these  same  interests  in  the  steel  business, 
notably  as  large  stockholders  in  the  United  States  Steel  Cor- 
poration. We  find  them  interested  in  copper,  the  Amalga- 
mated Copper  Company  being  a  notable  example.  We  find  them 
in  the  glucose  business,  particularly  in  the  Corn  Products  Re- 
fining Company.  We  find  that  they  have  even  invaded  the 
banking  field.  In  this  field  they  could  probably  say,  with 
.^neas,  quorum  pars  magna  fui,  a  great  part  of  which  I — not 
was— but  am.    They  could  even,  with  Pistol,  exclaim 

Why,  then  the  world's  mine  oyster. 
Which  I  with  sword  will  open. 

Also  in  other  realms  is  their  influence  felt— in  the  educational 
world,  in  religious,  humanitarian,  and  other  activities — with 
the  Congress  of   the  United  States  of  America  unwilling  to 

^RcDort  on  the  Petroleum  Industry,  part  II,  p.  42. 


THE  STANDARD  OIL  COMPANY  91 

give  a  charter  to  a  $100,000,000  of  this  money,  to  be  devoted 
in  perpetuity  to  the  good  of  mankind. 

Truly,  there  are  various  grave  and  far-reaching  problems 
connected  with  the  question  as  to  whether  a  monopoly  in  oil  is  to 
be  permitted  to  continue  as  being  on  the  whole  a  blessing  to 
mankind,  whether  a  few  cents  per  gallon  added  to  the  price  of  the 
oil  that  lights  the  humbler  worker's  home  or  to  the  price  of  the 
gasoline  that  drives  Ford  and  Packard  and  business  truck  is 
or  is  not  to  be  hereafter  the  stable  foundation  for  world-wide 
business  activities  and  for  humanitarian  succors  as  well. 


CHAPTER  VI 

THE  AMERICAN  SUGAR  REFINING  COMPANY  ^ 

The  early  history  of  the  sugar  trust,  touched  on  in  chapter  III, 
may  be  briefly  reviewed.  The  Sugar  Refineries  Company— a 
trustee  device — had  been  organized  in  1887.  In  1890  this  ar- 
rangement was  declared  illegal  by  the  New  York  courts,  and 
as  a  result  a  reorganization  was  determined  upon.  In  January, 
1891,  the  American  Sugar  Refining  Company  was  chartered  in  the 
state  of  New  Jersey, — then  a  place  of  refuge  for  combinations 
and  trusts.  The  new  company  had  an  authorized  capitalization 
of  $50,000,000,  half  preferred  stock  and  half  common.^  The 
American  Sugar  Refining  Company  exchanged  its  capital  stock 
for  the  trust  certificates  of  the  Sugar  Refineries  Company,  and 
thus  obtained  control  over  the  various  corporations  previously 
controlled  by  the  trustees.  The  American  Sugar  Refining  Com- 
pany next  caused  the  several  corporations,  seventeen  in  num- 
ber, to  convey  to  it  their  entire  property,  real  and  personal;  and 

1  On  the  American  Sugar  Refining  Company  see:  Original  petition  in 
United  States  v.  American  Sugar  Refining  Company  et  al.;  Hearings  before 
the  Special  Committee  of  the  House  on  the  Investigation  of  the  American 
Sugar  Refining  Company,  1911-1912;  House  Report  no.  3112,  50th  Cong., 
1st  Sess.,  1887-188S;  Report  of  Committee  on  General  Laws  relative  to 
"Trusts"  and  "Sugar  Trusts,"  transmitted  to  the  New  York  Legislature, 
April  30,  1 891;  Report  of  Joint  Committee  of  the  Senate  and  Assembly 
appointed  to  investigate  trusts,  transmitted  to  the  New  York  State  Legis- 
lature, March  9,  1897  (Lexow  Report);  Industrial  Commission,  vol.  I,  pp. 
43-166,  801-812;  121  New  York  Reports  582-626;  156  U.  S.  1-46;  Report  of 
the  Federal  Trade  Commission  on  the  Beet  Sugar  Industry  in  the  United 
States,  May  24,  1917;  Annual  Reports  of  the  Attorney  General  of  the  United 
States,  1909  ff.;  Willett  and  Gray's  Weekly  Statistical  Sugar  Trade  Journal; 
Taussig,  Some  Aspects  of  the  Tariff  Question,  Part  II  (Sugar);  Vogt,  The 
Sugar  Refining  Industry  in  the  United  States. 

-  Original  Petition  in  United  States  v.  American  Sugar  Refining  Company, 
p.  47.    Referred  to  hereafter  as  Original  Petition. 

92 


THE  AMERICAN  SUGAR  REFINING  COMPANY  93 

thereupon  dissolved  them.  Upon  the  completion  of  this  series  of 
transactions,  the  American  Sugar  Refining  Company  became  a 
property  owning  trust,  as  distinct  from  a  holding  company  trust. 

The  American  Sugar  Refining  Company  operated  only  four 
refineries, — the  Standard  Sugar  refinery  at  Boston,  the  Matth- 
iessen  and  Weichers  refinery  at  Jersey  City,  the  Havemeyers  and 
Elder  refinery  at  Brooklyn,  and  the  Louisiana  Sugar  refinery  at 
New  Orleans.  These  four  refineries  among  them  had  a  daily 
melting  capacity  of  about  70  per  cent  of  that  of  the  whole 
country.^  There  were  only  six  other  cane  sugar  refineries  in  the 
country,  and  one  of  these — the  Havemeyers  and  Elder  plant  in 
San  Francisco — was  for  all  practical  purposes  a  part  of  the  trust. 
The  owners  of  the  San  Francisco  plant  had  gone  into  the  "  trust" 
in  1888,  the  year  after  its  organization,  but  because  of  the 
opposition  of  the  state  of  California,  the  plant  had  been  trans- 
ferred to  Messrs.  H.  O.  Havemeyer,  T.  A.  Havemeyer,  and  C.  H. 
Senff,  members  of  the  board  of  trustees  of  the  Sugar  Refineries 
Company.  These  three  men  had  thenceforth  carried  on  the 
business  under  the  name  of  Havemeyers  and  Elder,  but  always  in 
cooperation  with  the  Sugar  Refineries  Company,  and  its  suc- 
cessor, the  American  Sugar  Refining  Company.  Including  the 
output  of  this  San  Francisco  refinery,  as  is  only  proper,  the 
American  Sugar  Refining  Company  controlled  at  its  organiza- 
tion about  75  per  cent  of  the  country's  melting  capacity.^ 

The  only  cane  sugar  refining  companies  outside  of  the  trust  in 
January,  1891,  were  the  California  Sugar  Refinery  at  San  Fran- 
cisco; the  Franklin  Sugar  Refining  Company,  the  E.  C.  Knight 
Company,  and  the  Delaware  Sugar  House,  all  located  at  Phila- 
delphia; and  the  Nash,  Spaulding  and  Company  at  Boston  (later 
known  as  the  Revere  Sugar  Refining  Company).  During  the 
course  of  the  year  1S91  the  Spreckels  Sugar  Refining  Company 
began  the  operation  of  a  large  new  refinery  at  Philadelphia;  and 
the  Baltimore  Sugar  Refining  Company  had  under  construction 
a  refinery  in  Baltimore.  The  sugar  trust  set  out  to  overcome  all 
these  competitors,  and  by  1892  had  acquired  all  of  them  but  one. 

The  first  to  succumb  was  the  California  Sugar  Refinery  at 
^Original  Petition,  p.  51.  2  jbi(j_^  pp_  51-52. 


94  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

San  Francisco,  owned  by  John  D.,  Adolph  B.,  and  Claus  Spreck- 
els.  In  March,  1 891,  in  order  to  bring  to  an  end  the  competitive 
campaign  which  had  been  instituted  against  this  company  by  the 
firm  of  Havemeyers  and  Elder,  the  Spreckels  concern  entered 
into  an  agreement  with  the  firm  of  Havemeyers  and  Elder 
whereby  there  was  incorporated  the  Western  Sugar  Refining 
Company,  a  California  corporation,  half  of  the  stock  in  which 
was  taken  by  each  party.  The  newly  organized  corporation, 
in  accordance  with  the  provisions  of  the  agreement,  leased  for 
a  term  of  ten  years  both  the  Havemeyers  and  Elder  refinery  and 
the  Spreckels  refinery.^  Shortly  thereafter  the  Western  Sugar 
Refining  Company  permanently  closed  the  Havemeyers  and 
Elder  refinery,  and  its  former  owners  sold  their  plant  and  their 
half  interest  in  the  Western  Sugar  Refining  Company  to  the 
American  Sugar  Refining  Company.  The  factory  continued 
to  be  so  owned  (subject  to  lease)  until  1906,  when  it  was 
destroyed  by  fire;  and  the  stock  continued  to  be  owned  by 
the  American  Sugar  Refining  Company  until  1911,  when, 
in  accordance  with  the  policy  of  the  new  management,  the 
American  Company  disposed  of  its  stock  to  the  Spreckels 
interests.  By  agreement  between  the  American  Sugar  Re- 
fining Company  and  the  Western  Company  the  territory  in 
which  each  was  to  sell  its  products  was  fixed,  and  also  the  prices 
at  which  sugar  was  to  be  sold.^ 

The  control  of  the  Baltimore  Sugar  Refining  Company  was 
effected  through  purchases  of  its  stock  in  1891  and  1892.  The 
factory  of  this  company  was  never  operated;  and  subsequently 
it  was  dismantled,  and  the  company  itself  dissolved.  The  pur- 
pose was  clearly  to  stifle  a  prospective  competitor.  Obviously 
no  economies  were  effected  through  the  closing  of  a  plant  that 
was  never  allowed  to  operate. 

In  March  and  April,  1892,  the  American  Sugar  Refining  Com- 
pany acquired  all  but  one  of  the  remaining  competitors.  Up  to 
March  of  this  year  competition  between  the  trust  and  the  inde- 
pendents (the  Franklin  Sugar  Refining  Company,  the  Spreckels 
Sugar  Refining  Company,  the  E.  C.  Knight  Company,  and  the 
1  Original  Petition,  pp.  52-53.  2  Ibid.,  p.  54. 


THE  AMERICAN  SUGAR  REFINING  COMPANY  95 

Delaware  Sugar  House)  had  been  severe,  and  the  price  of  sugar 
had  fallen  so  low  that  failure  confronted  some  of  these  com- 
panies. Relief  from  this  contingency  was  secured  by  selling  out 
to  the  trust, — the  capitalization  of  the  trust  being  increased  for 
this  purpose  from  $50,000,000  to  $75,000,000.  Shortly  after 
1892  the  American  Sugar  Refining  Company  consolidated  the 
Spreckels  refinery  and  the  Delaware  house  into  one;  and  the 
Franklin  and  Knight  refineries  into  one.  In  1897  the  Franklin 
Sugar  Refining  Company  closed  its  plant,  and  became  simply 
a  selling  agency  for  the  Spreckels  concern. 

By  April,  1892,  then,  the  first  period  of  competition  with  the 
trust  had  come  to  an  end.  The  struggle  had  been  severe,  but 
brief.  It  ended  in  the  purchase  by  the  American  Sugar  Refining 
Company  of  its  leading  competitors.  In  the  whole  country 
there  were  left  only  two  refineries  that  did  not  belong  to  the 
trust.  One  of  these  was  the  California  Sugar  Refinery,  leased 
to  the  Western  Sugar  Refining  Company,  half  of  the  stock 
of  which  was  held  by  the  trust;  and  the  other  was  the  small  re- 
fi-nery  in  Boston  owned  by  Nash,  Spaulding  and  Company, — a 
plant  which  the  trust  had  attempted  to  buy  in  1892,  but  without 
success.  The  American  Sugar  Refining  Company  produced  in 
1892,  including  the  output  of  the  California  Sugar  Refinery, 
substantially  controlled  by  it,  about  98  per  cent  of  the  country's 
output  of  refined  sugar.^ 

But  not  for  long  did  the  American  Sugar  Refining  Company 
maintain  its  well-nigh  complete  monopolistic  control  of  the  in- 
dustry. It  immediately  took  advantage  of  the  situation,  and 
advanced  the  price  of  refined  sugar  until  the  margin  between  the 
raw  and  refined  had  much  increased.^  Naturally  new  refineries 
were  built  in  order  to  profit  by  the  higher  prices;  in  fact  the 
history  of  the  trust  for  a  number  of  years  after  1892  was  one  of 
constant  endeavor  to  crush  or  to  bring  into  working  relations 
with  it  interests  that  would  not  sell  out. 

Already  in  1891  the  MoUenhauer  Sugar  Refining  Company 
had  been  incorporated;  and  soon  after  the  purchase  of  the  inde- 
pendent refineries  at  Philadelphia,  this  company  began  to  oper- 
'■  Original  Petition,  p.  60.  ^See  p.  117. 


96         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

ate  its  plant  at  Brooklyn.     In  September,  1892, — only  a  few 
months  after  the  acquisition  by  the  sugar  trust  of  all  the  Phila- 
delphia refineries,— the  National  Sugar  Refining  Company  was 
organized.     In  October  of  the  same  year  the  W.  J.  McCahan 
Sugar  Refining  Company  was  chartered,  and  in  the  following 
year  started  to  refine  sugar.    To  hold  this  competition  within 
bounds  the  American  Sugar  Refining  Company  in   1893  ac- 
quired 30  per  cent  of  the  stock  of  the  Mollenhauer  concern;  ^ 
and  in  1894  it  succeeded  in  effecting  agreements  with  its  com- 
petitors looking  toward  a  limitation  of  the  output  and  the  fix- 
ing of  prices.-  In  1895  the  United  States  Sugar  Refining  Com- 
pany was  formed  for  the  purpose  of  constructing  a  sugar  refinery 
in  Camden,  New  Jersey  (just  across  the  river  from  Philadelphia). 
But  before  the  plant  was  ready  for  operation,  the  American 
Company  purchased  all  its  stock;  and  the  plant  was  never  com- 
pleted.    In  1897  the  California  and  Hawaiian  Sugar  Refining 
Company  was  incorporated,  and  in  the  same  year  it  entered 
upon  the  refining  of  sugar  at  Crockett,  California.    This  con- 
cern refined  both  cane  and  beet  sugar.    Another  independent 
enterprise  established  in  1897  was  the  New  York  Sugar  Refin- 
ing Company,  fathered  by  Claus  Doscher,  a  capable  refiner 
who  had  disposed  of  his  property  to  the  trust  in  1887,  and  had 
given  up  the  business.    The  New  York  Sugar  Refining  Company 
was  formed  in  March,   1897,  and  its  refinery  was  completed 
toward  the  close  of  1898.    Another  very  important  competitor 
was  Arbuckle  Brothers,  best  known  as  a  coffee  house.     This 
firm  owned  a  machine  used  for  filling,  packing,  and  weighing 
coffee, — a  machine  which  it  beheved  could  also  be  profitably 
used  in  the  sugar  business.     In  1893,  therefore,  it  began  to 
buy  sugar  from  the  refineries,  and  to  put  it  up  in  packages  suit- 
able for  distribution  by  wholesale  grocers.    After  some  three  or 
four  years  the  firm  decided  that  it  would  build  a  refinery  of  its 
own;  and  by  the  middle  of  1898  the  plant  was  in  operation. 

Competition  was  thus  springing  up  on  all  sides,  and  it  was 
imperative  that  something  be  done,  unless  the  sugar  trust  was  to 

1  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  2924. 

2  House  Report  no.  331,  62nd  Cong.,  2nd  Sess.,  p.  4. 


THE  AMERICAN  SUGAR  REFINING  COMPANY  97 

abandon  its  monopolistic  purposes.  Accordingly,  in  September, 
1898,  the  American  Sugar  Refining  Company  appointed  a  com- 
mittee to  acquire  the  factories  of  any  and  all  independents,  this 
committee  being  authorized  to  pay  such  purchase  prices  as  it 
might  deem  fit.  In  order  to  facilitate  the  work  of  the  committee, 
the  price  of  refined  sugar  was  much  reduced.  Mr.  Jarvie,  one  of 
the  partners  in  the  firm  of  Arbuckle  Brothers,  testified  before  the 
Industrial  Commission  that  when  his  company's  refinery  was 
completed  in  August  of  iSgS,  the  margin  ranged  from  80  to  90 
cents  per  hundred  pounds;  that  prices  were  first  cut  in  Septem- 
ber, and  that  this  price  cutting  continued  unremittedly  through- 
out the  spring  of  1899.^  At  the  date  of  his  testmiony  (June, 
1899)  the  margin  was  51  cents  per  hundred  pounds  (which  was 
approximately  the  cost  of  refining),  and  the  margin  had  been  as 
low  as  32  cents,  which  was  20  to  30  cents  below  cost.^  As  a 
result  of  this  price  war  Arbuckle  Brothers  lost  a  great  deal  of 
money — approximately  a  million  and  a  quarter  dollars.^  An- 
other oflicer  of  the  Arbuckle  firm  testified  that  his  company  was 
hard  put  to  it  to  develop  its  business  because  the  wholesale 
grocers  in  some  localities  refused  to  distribute  the  goods  of 
competitors  of  the  American  Sugar  Refining  Company.^  This 
difficulty  was  obviated  in  Boston  by  Arbuckle  Brothers  dealing 
directly  with  the  retailers.  The  latter  were  given  sugar  at  the 
same  price  as  the  wholesalers,  irrespective  of  quantity;  and  even 
as  late  as  191 1  the  firm  still  dealt  directly  with  the  retailers  in 
that  city.^  A  special  retaliatory  measure  directed  against  the 
Arbuckle  firm  was  the  invasion  by  the  American  Sugar  Refining 
Company  of  the  coffee  business.  In  1896,  having  failed  in  an 
attempt  to  buy  the  patented  packing  machine  of  the  Arbuckle 
firm,  the  American  Sugar  Refining  Company,  through  Have- 
meyers  and  Elder,  purchased  a  large  interest  in  the  Woolson 

^  Industrial  Commission,  I,  p.  138. 
2  Ibid. 

'Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  pp. 
1131-1132. 

■*  Ibid.,  p.  1127. 
6  Ibid. 


qS       the  trust  problem  in  the  united  states 

Spice  Company  of  Toledo,  at  a  cost  of  $1,150  per  share,  plus 
commissions.^  The  Woolson  Spice  Company  promptly  reduced 
the  price  of  coffee,  and  forced  the  Arbuckle  concern  to  do  like- 
wise. But  this  campaign  did  not  bring  about  the  desired  result. 
The  Arbuckle  Brothers  did  not  give  in,  and  they  are  still  in  the 
sugar  business.  Moreover,  the  American  Sugar  Refining  Com- 
pany deemed  it  advisable  subsequently  to  give  up  its  coffee 
business,  the  sale  of  this  business  being  reported  by  the  directors 
in  their  annual  report  to  the  stockholders  in  1909. 

The  remaining  competitors,  or  "  interlopers,"  as  Mr.  Have- 
meyer  called  them,  proved  more  tractable.  Through  the 
formation  in  May,  1900,  of  a  holding  company,  organized 
largely  by  individuals  dominant  in  the  management  of 
the  American  Sugar  Refining  Company,  the  other  refiners 
of  cane  sugar  were  brought  into  harmony  with  the  trust." 
The  name  of  the  holding  company  was  the  National  Sugar 
Refining  Company  of  New  Jersey,  capitalized  at  $20,000,000, 
half  preferred  and  half  common.  The  National  Sugar  Re- 
fining Company  of  New  Jersey  acquired  the  entire  capital 
stock  of  the  Mollenhauer  Sugar  Refining  Company,  the  Na- 
tional Sugar  Refining  Company,  and  the  New  York  Sugar 
Refining  Company  (also  its  entire  bond  issue),  giving  in  exchange 
therefor  $8,250,000  of  its  own  preferred  stock.  Most  of  the 
balance  of  the  preferred  stock  was  used  to  buy  25  per  cent  of  the 
stock  of  the  McCahan  Sugar  Refining  Company.  The  National 
Sugar  Refining  Company  of  New  Jersey  continued  to  hold  the 
stocks  and  bonds  of  these  companies,  and  managed  their  affairs 
in  harmony.  The  common  stock  of  the  National  Sugar  Refining 
Company  of  New  Jersey  ($10,000,000)  was  given  to  Mr.  H.  0. 
Havemeyer,  the  president  of  the  American  Sugar  Refining 
Company,  as  promoters'  profit.^     Mr.  Havemeyer  thereupon 

1  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  2932, 
and  Lexow  Report,  pp.  80,  133. 

"^  In  the  case  of  the  CaHfornia  and  Hawaiian  Sugar  Refining  Company 
cooperative  relations  were  not  established  until  1903. 

^  Original  Petition,  p.  75,  and  Hearings  on  the  American  Sugar  Refining 
Company,  1911-1912,  p.  483. 


THE  AMERICAN  SUGAR  REFINING  COMPANY  99 

delivered  this  stock  to  himself  and  to  Mr.  L.  M.  Palmer,  both  of 
them  directors  in  the  American  Sugar  Refining  Company,  as 
trustees  under  a  voting  trust  for  five  years,  the  beneficiaries 
being  Mr.  Havemeyer,  Mr.  Palmer,  Mr.  W.  B.  Thomas,  Mr.  J. 
E.  Parsons,  and  Mr.  J.  H.  Post,  all  of  them,  with  one  exception 
possibly,  ofiicers  in  the  American  Sugar  Refining  Company.^  As 
part  of  this  same  set  of  transactions,  the  American  Sugar  Refin- 
ing Company  on  its  own  account  acquired  $5,128,000  of  the 
preferred  stock  of  the  National  Sugar  Refining  Company  of  New 
Jersey.  (This  included  the  |i90o,ooo  of  preferred  stock  in  this 
company  received  by  the  American  Sugar  Refining  Company  in 
exchange  for  the  Mollenhauer  stock  acquired  by  it  in  1893.)  The 
American  Sugar  Refining  Company  therefore,  either  directly  or 
through  its  officers,  held  three-fourths  of  the  stock  of  the  newly 
organized  holding  company;  and  as  a  natural  result  competition 
between  these  concerns  was  eliminated,  except  such  competition 
as  resulted  from  Mr.  Havemeyer's  general  policy  of  promoting 
competition  for  business  among  the  several  plants.  A  suit  to 
invalidate  the  issue  of  the  common  stock  on  the  ground  that  it 
was  made  without  any  consideration  and  contrary  to  the  laws  of 
New  Jersey,  was  filed  in  191 1.  Mr.  Horace  Havemeyer,  a  son  of 
the  former  head  of  the  American  Sugar  Refining  Company,  in  tes- 
timony before  an  investigating  committee  implied  that  this  suit 
was  brought  because  he  (the  son)  had  resigned  from  the  direc- 
torate of  the  American  Sugar  Refining  Company,  and  proposed  to 
make  the  National  Sugar  Refining  Company  a  real  competitor.^ 
As  the  result  of  this  proceeding  the  common  stock  was  cancelled, 
and  the  American  Sugar  Refining  Company,  owning  the  major- 
ity of  the  preferred  stock,  came  into  direct  control  of  the  com- 
pany. Subsequently  it  offered  to  its  own  shareholders  the  right 
to  subscribe  at  par  for  $5,000,000  of  its  $5,128,200  stock  in  the 
National  Company.  Many  of  them  refused  to  make  the  ex- 
change; and  the  American  Company  thus  continued  to  hold 
nearly  one-fourth  of  the  stock  in  its  own  treasury. 

^  Original  Petition,  p.  76. 

'^Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  pp. 
569-57°' 


lOO        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

By  1900,  competition,  though  not  eUminated,  was  clearly  held 
within  bounds.  The  natural  consequence  was  an  advance  in  the 
price  of  refined  sugar.^  This,  in  turn,  soon  led  to  the  building  of 
competing  refineries.  Among  the  new  enterprises  established 
were  the  Federal  Sugar  Refining  Company,  the  Warner  Sugar 
Refining  Company,  the  Colonial  Sugars  Company,  and  the 
Cunningham  Sugar  Refining  Company. 

The  American  Sugar  Refining  Company,  for  its  part,  con- 
tinued iactive  in  the  attempt  to  eliminate  competition.  In 
1903  the  Western  Sugar  Refining  Company,  in  order  to  drive 
out  of  business  the  California  and  Hawaiian  Sugar  Refining  Com- 
pany (its  only  rival  for  the  Pacific  Coast  trade),  swamped  the 
markets  of  the  latter  with  refined  sugar  sold  below  the  cost 
of  production,  with  consequent  financial  loss  for  the  smaller 
concern.^  Confronted  with  bankruptcy,  the  California  and 
Hawaiian  Sugar  Refining  Company  agreed  in  1903  that  for  a 
period  of  three  years  it  would  not  manufacture  or  sell  any  refined 
cane  sugar,  and  that  it  would  permit  its  beet  sugar  output  to  be 
marketed  by  the  Western  Sugar  Refining  Company.^  During 
the  life  of  the  agreement,  the  California  and  Hawaiian  concern 
refined  no  sugar  of  any  kind,  either  from  cane  sugar  or  from 
sugar  beets;  but  it  was  paid  the  sum  of  $200,000  a  year,  this  pay- 
ment being  clearly  for  the  purpose  of  restraining  its  competition. 

In  1904,  also,  the  American  Sugar  Refining  Company  put  an 
end  to  the  proposed  competition  of  the  Pennsylvania  Sugar 
Refining  Company.^  This  concern  had  been  organized  in  1S83, 
with  a  capital  of  $100,000.  In  1903  its  authorized  capital  was  in- 
creased to  $5,000,000,  and  the  company  was  nearly  ready  to  begin 
operating  a  newly  erected  refinery.  A  majority  of  the  stock 
of  the  Pennsylvania  Sugar  Refining  Company  (26,000  shares  out 
of  50,000)  was  held  by  the  Champion  Construction  Company, 
which,  in  turn,  was  controlled  by  Mr.  Adolph  Segal.  The  Con- 
struction Company,  under  contract,  was  building  and  equip- 

'  See  p.  117. 

^Original  Petition,  p.  81. 

3  Ibid. 

*  On  this  episode  see  Original  Petition,  pp.  82-88. 


THE  AMERICAN  SUGAR  REFINING  COMPANY         lOl 

ping  the  Pennsylvania  Sugar  Refinery,  and  it  was  also  building 
a  large  apartment  house  in  Philadelphia.  It  was  thus  in  need 
of  funds.  Aware  of  these  facts,  Mr.  Gustav  E.  Kissel,  an  officer 
and  director  of  the  American  Sugar  Refining  Company,  acting 
for  the  company,  lent  Mr.  Segal  the  sum  of  $1,250,000  on  a  one- 
year  note  dated  January  4,  1904.  As  security  for  the  payment  of 
the  note  when  due,  Mr.  Segal  transferred  to  Mr.  Kissel  26,000 
shares  and  $500,000  in  bonds  of  the  Pennsylvania  Sugar  Refining 
Company,  together  with  written  authority  to  vote  the  stock,  the 
Champion  Construction  Company  having  given  its  consent  to  this 
transaction.  The  petition  of  the  government  charged  that  Mr. 
Segal  was  not  aware  that  the  American  Sugar  Refining  Company 
was  the  real  lender  of  the  money,  and  that  he  had  no  reason  to 
believe  that  the  lender  had  any  ulterior  purpose.  But  Mr. 
Kissel,  controUing,  as  he  did,  the  Pennsylvania  Sugar  Refining 
Company,  caused  four  of  the  seven  directors  to  resign,  and  him- 
self and  three  others  to  be  elected  in  their  stead.  Thereupon  they 
had  spread  upon  the  minutes  a  resolution  that  the  refinery  be 
closed.  Having  prevented  the  operation  of  the  refinery,  which 
would  probably  have  put  Mr.  Segal  in  funds  with  which  to  meet 
the  note,  Mr.  Kissel  and  the  ofl&cials  of  the  American  Sugar 
Refining  Company  succeeded  during  the  years  1904,  1905,  and 
1906 — the  petition  relates — in  so  involving  Mr.  Segal  in  business 
complications,  and  in  so  embarrassing  him,  that  he  found  him- 
self unable  to  pay  even  the  interest  on  his  note;  and  until  1909 
the  note  remained  unpaid  and  the  refinery  idle. 

-Because  of  this  transaction  the  receiver  of  the  Pennsylvania 
Sugar  Refining  Company  brought  suit  against  the  American 
Sugar  Refining  Company  under  the  Sherman  law  for  treble  dam- 
ages. The  American  Company  finally  settled  by  paying  $750,- 
000  in  cash,  and  returning  the  securities.^  The  American 
Company  never  got  back  the  principal  of  the  loan,  hence  the 
transaction  cost  it  $2,000,000.  Counsel  for  the  American  Com- 
pany testified  that  the  settlement  was  made  because  the  suit 
was  instituted  at  about  the  time  of  the  underweighing  cases, 

1  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912, 
p.  220. 


i02        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

and  the  feeling  against  the  American  Company  was  so  strong 
that  the  trial  would  have  proven  a  farce. 

In  1908,  another  independent  concern,  the  Colonial  Sugars 
Company,  operating  a  small  refinery  in  Louisiana,  was  acquired 
by  the  Cuban-American  Sugar  Company.  The  latter  concern 
was  a  combination  of  several  raw  sugar  producing  companies  in 
Cuba,  and  according  to  the  government  petition  was  operated  in 
harmony  with  the  American  Sugar  Refining  Company,  the 
latter  having,  in  fact,  lent  it  large  sums  of  money,  and  having  in 
other  ways  dominated  its  affairs.^ 

This  left  as  independent  cane  sugar  refineries  only  Arbuckle 
Brothers,  the  Federal  Sugar  Refining  Company,  the  Warner 
Sugar  Refining  Company,^  the  Revere  Sugar  Refining  Company, 
the  Cunningham  Sugar  Refining  Company,  and  two  individual 
plants,  one  of  which  in  1909  was  not  in  operation. 

We  turn  now  to  the  beet  sugar  industry,  and  to  the  attempt  of 
the  American  Sugar  Refining  Company  to  duplicate  here  the 
considerable  degree  of  success  attained  in  the  cane  sugar 
branch. 

The  beet  sugar  industry  in  this  country  is  comparatively  new. 
Prior  to  1898  the  production  of  refined  sugar  from  domestic 
beets  hardly  exceeded  in  any  year  2  per  cent  of  the  country's  out- 
put of  refined  sugar.  Under  the  protection  afforded  by  the 
Dingley  tariff  of  1897,  however,  the  industry  developed  rapidly. 
In  1901,  7  per  cent  of  the  sugar  consumed  was  beet  sugar;  in  1909, 
14  per  cent.^ 

Up  to  1901  the  American  Sugar  Refining  Company  had  had 
little  to  do  with  the  beet  sugar  industry.  In  1897  it  had  pur- 
chased from  the  Spreckels  family  a  one-half  interest  in  the  West- 
ern Beet  Sugar  Company, — a  company  incorporated  in  1887,  and 
possessing  a  factory  in  California.  In  the  same  year  (1897)  the 
two  interests  had  incorporated  the  Spreckels  Sugar  Refining 

1  Original  Petition,  pp.  88-89. 

^  These  three  companies  refined  in  1909  some  8.70,  6.30  and  2.50  per  cent, 
respectively,  of  the  country's  output.  Hearings  on  the  American  Sugar 
Refining  Company,  1911-1912,  p.  43. 

3  Original  Petition,  p.  93. 


THE  AMERICAN  SUGAR  REFINING  COMPANY         103 

Company,  which  was  to  build  a  new  factory  in  the  same  state. 
The  following  year  this  newly  organized  company  acquired  all 
of  the  stock  of  the  Western  Beet  Sugar  Company,  and  perma- 
nently closed  the  factor^'.  The  Spreckels  Sugar  Company  after 
its  organization  sold  all  its  product  through  the  Western  Sugar 
Refining  Company,  one-half  of  the  stock  in  which,  as  we  have 
seen,  was  owned  by  the  American  Sugar  Refining  Company.  A 
half-interest  in  one  concern  represented,  therefore,  the  American 
Sugar  Refining  Company's  total  investment  in  the  beet  sugar 
business  up  to  1901. 

The  beet  sugar  industr^^  however,  was  steadily  growing  in 
importance,  and  in  some  localities  was  becoming  a  serious  com- 
petitor of  cane  sugar.  By  1901  there  were  thirty-one  separate 
concerns  manufacturing  beet  sugar,  and  eight  others  were  plan- 
ning to  enter  the  business.^  The  American  Sugar  Refining  Com- 
pany apparently  came  to  the  conclusion  that  it  must  eliminate 
this  growing  competition.  Having  obtained  the  necessary  funds 
by  an  increase  in  its  capital  stock  from  $75,000,000  to  $90,000,- 
000,  the  company  in  the  summer  of  1901  manufactured  an  un- 
usually large  quantity  of  refined  sugar  for  the  purpose,  so  the 
government  petition  alleged,  of  selling  it  in  the  markets  of  its 
rivals.-  About  the  same  time  Mr.  H.  O.  Havemeyer  and  Mr.  L. 
M.  Palmer  entered  into  unlawful  agreements  with  various  rail- 
roads leading  out  of  Boston,  New  York,  Jersey  City,  Philadel- 
phia, and  New  Orleans,  for  the  transportation  at  rates  much  be- 
low ihe  published  tariffs  of  large  quantities  of  refined  sugar,  and 
for  the  free  storage  of  this  sugar  in  warehouses  belonging  to  the 
railroads.^  The  amount  of  rebates  paid  to  the  American  Sugar 
Refining  Company  during  the  years  1901-1904  totalled  $500,000.^ 
The  next  step  was  the  sale  of  this  sugar  in  the  markets  of  the 
beet  sugar  companies  at  prices  below  the  cost  of  production.^ 
This  move  forced  the  beet  sugar  refineries  to  sell  out  to  the  Amer- 
ican Sugar  Refining  Company  or  face  the  prospect  of  ruin;  and 
many  of  them  decided  to  sell. 

^  Original  Petition,  p.  96.  '  Ibid.,  pp.  98-99. 

2  Ibid.,  pp.  97-98.  ■*  Ibid.,  p.  99. 

6  Ibid. 


I04        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

The  most  important  concern  over  which  control  was  secured 
was  the  American  Beet  Sugar  Company.  This  concern,  with  a 
capital  of  $20,000,000,  was  the  leading  beet  sugar  enterprise  in 
the  country;  it  had  five  plants,  and  was  steadily  increasing  its 
business.  The  American  Sugar  Refining  Company  and  the 
American  Beet  Sugar  Company  entered  in  1902  into  a  ten-year 
contract  whereby  the  former  was  to  become  the  supervising  agent 
for  the  disposal  of  the  product  of  the  latter  at  a  commission  of 
one-quarter  of  a  cent  per  pound.^  The  American  Sugar  Refining 
Company  agreed  during  the  beet  sugar  season, — beet  sugar  comes 
on  the  market  only  during  a  limited  period  following  the  matur- 
ing of  the  beet  sugar  plant, — not  to  sell  sugar  in  the  markets  of 
the  American  Beet  Sugar  Company  except  at  its  regular  open 
price  at  the  point  of  production,  plus  freight.  This  clause  was 
inserted,  according  to  the  vice  president  of  the  Beet  Sugar  Com- 
pany, to  prevent  local  price  cutting  by  the  trust.-  A  drop  in  the 
price  of  refined  sugar  at  the  Missouri  River  from  5  cents  to  3^ 
cents  in  one  day  was  not  competition,  in  his  opinion,  but  war- 
fare. At  about  the  same  time  the  American  Sugar  Refining  Com- 
pany acquired  $7,500,000  of  the  Beet  Sugar  Company's  stock. 
The  agreement  remained  in  force  until  1907,  and  the  stock  con- 
tinued to  be  held  until  1907  or  later;  but  after  1909  the  two  com- 
panies do  not  seem  to  have  acted  in  cooperation.^  The  pres- 
ident of  the  American  Beet  Sugar  Company  testified  that  the 
agreement  was  abrogated  on  the  recommendation  of  counsel,  who 
advised  that  the  contract,  if  not  cancelled,  would  land  the 
parties  thereto  in  the  penitentiary."* 

Several  other  companies  were  acquired  by  the  sugar  trust  in 
the  years  that  followed;  but  we  need  not  go  into  the  details.^ 
Suffice  it  to  say  that  at  high-water  mark  the  American  Sugar 
Refining  Company  had  about  $35,000,000  in  beet  sugar 
companies,  not  including  the  very  large  personal  interest  of  the 

'Original  Petition,  p.  loi. 

2  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  389. 

'Original  Petition,  p.  102. 

*  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  391. 

^They  may  be  found  in  Original  Petition,  pp.  103-132. 


THE  AMERICAN  SUGAR  REFINING  COMPANY         105 

various  officials  of  the  company — the  Havemeyer  estate,  for  ex- 
ample, in  191 1  had  about  $10,000,000  of  stock  in  beet  sugar  com- 
panies.^ Of  the  $35,000,000,  approximately  $12,000,000  was 
subsequently  disposed  of,  some  during  ]\Ir.  Havemeyer's  life,  but 
most  of  it  after  his  death.  Yet  even  as  late  as  191 1  the  company 
had  a  majority  interest  in  two  beet  sugar  factories,  and  a  min- 
ority interest  in  thirty-one.-  The  total  number  of  beet  sugar  fac- 
tories in  the  country  was  68.^  The  trust,  therefore,  had  some 
interest  in  approximately  one-half  of  the  factories,  and  presum- 
ably on  the  whole  the  more  important  ones. 

Having  traced  briefly  the  history  of  the  American  Sugar 
Refining  Company's  attempt  to  control  the  sugar  industry,  we 
may  next  inquire  in  more  detail  into  the  success  of  its  endeavors. 
To  do  this  with  any  degree  of  completeness  is  difficult;  full 
figures,  except  for  recent  years,  are  not  available.  Nevertheless 
it  is  certain  that  the  company  at  one  time  did  succeed  in  effect- 
ing practically  a  complete  monopoly,  and  that  subsequently  it 
lost  ground  materially.  It  is  probable  that  it  does  not  now 
control  enough  of  the  business  to  be  considered  a  trust. 

The  Sugar  Refineries  Company  (the  trustee  device)  produced 
in  1887  about  78  per  cent  of  the  country's  output  of  refined 
sugar."*  The  next  year,  after  the  acquisition  of  a  leading  com- 
petitor, its  proportion  increased  to  about  82  per  cent.  The 
American  Sugar  Refining  Company  upon  its  organization  in 
1891 — taking  the  place  of  the  former  ''trust" — controlled  about 
75  per  cent  of  the  refining  capacity  of  the  country.^  In  1892 
every  competitor  in  the  country  except  one  was  acquired,  and 
as  a  result  the  company  produced  98  per  cent  of  the  country's 
output  of  cane  sugar, — the  output  of  beet  sugar  was  a  negligible 
factor  at  that  time.  This  represented  the  high-water  mark. 
During  the  three  years  1907-1909,  the  American  Sugar  Refining 

^  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  pp.  559, 
2027. 

^  Ibid.,  p.  42. 

*  Ibid.,  p.  40. 

^Original  Petition,  pp.  38-40. 

*See  p.  93. 


io6        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 


Company  and  its  affiliated  concerns  made,  according  to  the  peti- 
tion of  the  government,  only  about  72  per  cent  of  all  the  refined 
sugar  consumed  in  the  United  States  not  produced  from  domestic 
beets;  and  in  1909  about  70  per  cent  of  the  total  output  of  re- 
fined sugar,  cane  and  beet.^  The  government  in  bringing  a 
dissolution  suit  would  not  be  likely  to  underestimate  the  control, 
hence  it  is  reasonably  certain  that  the  sugar  trust  had  lost 
ground.  If  we  may  accept  figures  presented  by  the  American 
Sugar  Refining  Company,  before  a  congressional  investigating 
committee,  to  prove  that  the  company  was  not  an  illegal  com- 
bination, the  company  has  been  unsuccessful  in  its  attempt  to 
control  the  industry.  These  figures  are  shown  in  the  table  below.^ 

Production  of  Refined  Sugar  in  the  United  States,  1900-1910 


Year 

Total  quantity 

refined.    Barrels. 

000  omitted 

Quantity  refined 

by  American 

Sugar  Refining  Co. 

Barrels. 

000  omitted 

Per  cent  refined 

by  American 

Sugar  Refining  Co. 

IQOO 

13,943 
14,642 
16,136 
15,868 
16,787 
16,042 
17,666 
18,201 

19,341 
19,906 
21,010 

9,378 
8,482 

9,193 
8,767 
9,748 
8,484 
9,014 
8,966 

8,731 
8,588 

8,853 

67.30 

IQOI 

57-90 

1902 

56.97 

IQC^ 

55-25 

IQ04 

58.07 

too:;     

52.89 

1 906 

51.03 

IQ07 

49.27 

1 908 

45-14 

lOOQ 

43-14 

I9IO 

42.14 

This  table,  prepared  by  Willett  and  Gray,  would  seem  tc 
show  that  the  American  Sugar  Refining  Company,  at  the  time 
when  the  government  brought  its  dissolution  suit  (November, 
1910),  no  longer  possessed  monopolistic  control.  While  in  1900 
it  produced  67.30  per  cent  (about  two-thirds)  of  the  total  quan- 
tity of  sugar  refined  in  this  country,  by  1910  it  was  producing 

'  Original  Petition,  pp.  139,  142. 

2  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  43. 


THE  AMERICAN  SUGAR  REFINING  COMPANY         107 

only  42  per  cent.  But  these  figures  hardly  portray  the  real 
situation.  While  the  table  may  be  accepted  as  representing 
truthfully  the  actual  production  of  the  American  Sugar  Refining 
Company,  it  does  not  show  the  degree  of  control  exercised  by  it. 
For  instance,  in  the  production  of  the  company  there  is  included 
one-half  of  the  output  of  the  Western  Sugar  Refining  Company, 
in  which  the  American  Sugar  Refining  Company  had  a  one-half 
interest.^  But  to  consider  the  other  half  as  competitive  would  be 
unwarranted.  The  Western  Sugar  Refining  Company  and  the 
American  Sugar  Refining  Company  worked  together  in  such 
harmony  that  the  total  output  of  the  Western  Company  might 
properly  be  considered  as  being  controlled  by  the  American 
Company.  Adding  the  other  half  of  the  Western  Com- 
pany's output  we  get  43.38  per  cent  in  1910,  instead  of  42.14  per 
cent."  Again,  the  American  Sugar  Refining  Company  had  about 
one-quarter  interest  in  the  National  Sugar  Refining  Company; 
and  the  Havemeyer  estate  held  approximately  a  one-half  interest. 
Up  to  191 1  the  Havemeyers — the  only  son  of  Mr.  H.  O.  Have- 
meyer was  a  director  of  the  American  Company  until  January, 
191 1 — worked  in  harmony  vdih  the  American  Sugar  Refining 
Company,  and  therefore  the  output  of  the  National  Company 
could  hardly  be  classed  as  independent.^  The  output  of  the 
National  Company  in  1910  was  1 1.40  per  cent  of  the  total,^  which 
being  added  to  the  figure  of  43.3S  per  cent  would  raise  the  per- 
centage of  the  American  Sugar  Refining  Company  to  54.78. 
Finally,  the  American  Sugar  Refining  Company  had  in  1910  an 
interest  in  eleven  beet  sugar  companies,  refining  7.43  per  cent 
of  the  country's  output  of  sugar.  ^  Were  we  to  include  the  pro- 
duction of  these  concerns,  the  American  Sugar  Refining  Com- 
pany controlled  in  19 10, — the  year  in  which  the  government 
brought  its  suit, — 62.21  per  cent  of  the  total  output.^    Whether 

1  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  43. 

2  Ibid.,  p.  57. 
'  See  p.  98. 

*  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  58. 
5  Ibid.,  p.  58. 

*  This  includes  none  of  the  output  of  the  McCahan  Sugar  Refining  Com- 
pany (producing  about  3.0  per  cent  of  the  total  output),  one-fourth  of  the 


lo8      THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

this  was  sufficient  to  enable  it  to  dominate  the  industry  is  open 
to  question.  Yet  it  is  clear  that  the  sugar  trust  was  not  able  to 
maintain  its  position  against  the  independent  refiners,  in  spite 
of  the  fact  that  it  assimilated  from  time  to  time  its  more  vigorous 
competitors.  Moreover,  by  1919  the  proportion  of  the  American 
Sugar  Refining  Company,  as  calculated  by  Willett  and  Gray, 
had  fallen  to  27.02  per  cent,  as  compared  with  42.14  per  cent  in 
1910.'  What  does  this  indicate  as  to  the  economies  of  the  trust 
form  of  organization? 

As  usual,  it  is  difficult  to  obtain  information  as  to  the  nature 
and  importance  of  the  economies  effected  by  the  establishment 
of  a  trust.  Mr.  Havemeyer,  when  asked  by  the  Industrial 
Commission  as  to  the  advantages  that  resulted  from  the  organi- 
zation of  the  sugar  trust,  replied  that  the  greatest  advantage  lay 
in  working  the  refineries  full  and  uninterruptedly.  We  may  quote 
from  his  testimony.  "If  you  have  a  capacity  of  140,000,000 
and  can  only  melt  100,000,000  somebody  has  got  to  cut  down 
materially.  The  moment  you  cut  down  you  increase  the 
cost;  by  buying  up  all  the  refineries,  burning  them  up,  and 
concentrating  the  meltings  in  four  refineries  and  working  them 
full,  you  work  at  a  minimum  cost.  .  .  . 

"Q.  So  the  chief  advantage  in  the  combination  was  in  con- 
centrating the  production  and  destroying  the  poor  refineries? 

"A.  Precisely."  ^ 

The  demand  for  sugar  varies,  of  course,  from  time  to  time, 
and  the  American  Sugar  Refining  Company  realized  a  further 
gain  through  its  practice  of  adjusting  the  supply  of  sugar  to  the 
demand  by  its  use  of  the  Brooklyn  refinery.  The  refineries  at 
Boston,  Jersey  City,  Philadelphia,  and  New  Orleans^  were  run 
to  their  full  capacity  practically  all  of  the  time,  while  the  output 

stock  of  which  was  held  by  the  National  Sugar  Refining  Company  of  New 
Jersey.    Hearings  on  the  American  Sugar  Refining  Company,  1911-1912, 

P-  43- 

1  See  Annual  Report  of  the  American  Sugar  Refining  Company,  1019,  p.  23. 

2  Industrial  Commission,  I,  pp.  109-110. 

*  The  necessity  of  importing  raw  sugar  has  influem  e<l  the  estaljlishment  of 
refineries  at  Boston,  New  York,  Jersey  City,  IMiiladelpliia,  Baltimore,  New 
Orleans,  and  San  Francisco. 


THE  AMERICAN  SUGAR  REFINING  COMPANY         109 

of  the  Brooklyn  refinery  was  made  to  fluctuate  according  to  the 
state  of  the  market.  By  this  arrangement  the  loss  resulting  from 
a  partial  output  was  concentrated  on  one  plant,  especially 
designed  for  the  purpose.  It  has  been  estimated  that  the  Ameri- 
can Sugar  Refining  Company  through  this  device  effected  a 
saving  at  times  of  as  much  as  one-eighth  of  a  cent  per  pound. 
Obviously  this  represents  an  advantage  only  when  the  demand 
for  sugar  is  so  small  that  all  the  plants  can  not  be  operated  at 
capacity. 

According  to  Mr.  Havemeyer  the  bringing  of  a  number  of  men 
into  a  combination  was  also  advantageous  in  promoting  im- 
provements and  more  skilful  methods;  for  each  man  absorbed 
ideas  from  the  others.^  The  saving  in  the  cost  of  superintend- 
ence, in  his  opinion,  was  inappreciable. 

The  trust  also  had  an  advantage,  perhaps,  in  handling  labor 
difiiculties.  A  strike  declared  at  the  Brooklyn  refinery  in  the 
summer  of  19 10  was  defeated,  largely  because  the  American 
Company,  having  two  refineries  in  reserve,  was  able  to  supply 
the  demand  for  sugar  without  operating  the  plant  at  which 
the  strike  occurred.- 

In  spite  of  these  advantages,  and  perhaps  others,  the  inde- 
pendent refiners  have  stated  most  emphatically  their  belief  that 
they  could  make  sugar  as  cheaply  as  the  American  Sugar  Refin- 
ing Company.  Mr.  Jarvie,  a  partner  of  the  firm  of  Arbuckle 
Brothers,  testified  before  the  Industrial  Commission  that  his 
refinery  was  large  enough  and  well  enough  equipped  to  secure 
the  advantages  of  the  division  of  labor  as  completely  as  the 
American  Sugar  Refining  Company;  and  that  the  latter  could 
not  refine  and  sell  sugar  more  cheaply  than  his  firm.^  Mr. 
Arbuckle  testified  in  1911  as  follows:  ''We  claimed,  and  I  believe 
the  trade  claimed,  that  we  had  the  most  economical  refinery  in 
the  country,  and  that  we  could  refine  sugar  as  cheap,  if  not 
cheaper,  than  any  of  them."  ^    Mr.  Gilmore,  of  the  same  con- 

1  Industrial  Commission,  I,  p.  no. 

2  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  2994. 
*  Industrial  Commission,  I,  p.  139. 

^Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  2318. 


no        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

cern,  testified  that  his  firm  after  considerable  experimentation  had 
found  an  output  of  7,500  barrels  a  day  to  be  the  most  economic 
unit.^  When  asked  whether  a  sugar  refinery  had  to  be  enor- 
mously large  to  refine  economically,  he  replied  that  that  was  not 
his  experience.  The  plant  might  be  too  large;  and  thus  be 
cumbersome.  An  output  of  20,000  barrels,  for  example,  would 
not,  in  his  opinion,  show  any  economy  over  7,500  barrels.  Fur- 
thermore, it  did  not  require  a  combination  of  refineries  to  manu- 
facture sugar  economically. 

The  foregoing  testimony  of  the  independents  is  not  regarded 
as  proof  of  the  inability  of  the  American  Sugar  Refining  Com- 
pany to  produce  more  cheaply  than  its  smaller  rivals.  The 
company,  for  its  part,  claims  just  the  opposite.  In  the  Annual 
Report  for  1909,  for  example,  the  company,  referring  to  the  fact 
that  the  new  refinery  at  Chalmette,  Louisiana  (near  New  Or- 
leans) was  equipped  with  the  latest  labor-saving  machinery, 
stated  that  it  was  expected  that  sugar  could  be  refined  more 
cheaply  at  this  refinery  than  at  any  other  in  the  country.-  The 
relative  economy  of  single  plants  and  combined  plants  thus 
appears  to  be  a  matter  upon  which  the  disinterested  investigator 
can  as  yet  do  little  but  speculate. 

Such  monopoHstic  control  as  the  American  Sugar  Refining 
Company  had  at  the  date  of  the  government  dissolution  suit 
(1910)  was  not  the  result  of  its  ownership  of  the  principal  raw 
material.  The  acting  president  of  the  company  introduced  as 
part  of  his  testimony  before  a  congressional  investigating  com- 
mittee a  statement  of  the  company  to  the  effect  that  it  owned 
no  cane  sugar  lands,  and  was  not  interested  directly  or  in- 
directly in  such  lands.^  A  few  officials  of  the  company,  includ- 
ing the  acting  president,  then  owned  sugar  lands  in  Cuba, 
but  the  testimony  was  that  this  sugar  was  sold  to  the  highest 
bidder.  Of  course,  the  fact  that  the  American  Sugar  Refining 
Company  was  such  a  large  buyer  of  raw  sugar  gave  it  some 

'Hearings    on    the    American    Sugar    Refining    Company,    1911-1912, 
pp.  1151-1152. 
^  Ibid.,  p.  2991. 
'  Ibid.,  p.  40. 


THE  AMERICAN  SUGAR  REFINING  COMPANY         ill 

control  over  the  price,  but  this  is  quite  different  from  the  estab- 
lishment of  a  monopoly  through  the  actual  ownership  of  the 
supply  itself. 

Neither  was  the  American  Sugar  Refining  Company's  power 
the  result  of  patent  rights.  The  company  does  not  appear  to 
have  derived  any  special  advantage  through  the  control  of 
patented   machinery. 

To  what,  then,  may  we  ascribe  its  more  or  less  dominant 
position? 

The  record  of  the  trust's  relations  with  the  federal  govern- 
ment is  not  one  of  which  it  can  be  proud.  The  trust  has  been 
a  noted  recipient  of  tariff  favors.  Without  venturing  to  discuss 
the  merits  of  the  protective  system,  it  may  be  said  that  the 
sugar  duties  for  many  years  have  been  arranged  without  refer- 
ence to  any  legitimate  protective  principle.  The  differential 
on  refined  sugar  under  the  act  of  1883,  for  example,  was  con- 
siderably greater  than  the  total  cost  of  refining,  and  this  virtu- 
ally prevented  the  importation  of  refined  sugar. ^  The  prohibi- 
tory duty  undoubtedly  promoted  the  establishment  of  the  trust 
in  1887,  and  enabled  it  to  make  enormous  profits.  In  the  act  of 
1890  raw  sugar  was  admitted  free  (a  bounty  being  given  to 
domestic  producers),  but  the  differential  on  refined  was  still 
high  enough  to  shut  out  foreign  competition,^  and  therefore  to 
facilitate  the  charging  of  monopoly  prices,  especially  upon  the 
practical  elimination  of  domestic  competition  in  1892.  Hosti- 
lity toward  the  sugar  trust  became  intense  during  the  early 
nineties,  and  for  a  time  bade  fair  to  lead  to  the  entire  removal 
of  the  duty  on  sugar,  both  raw  and  refined,  in  the  Wilson  tariff 
act  of  1894.  Yet  it  is  a  matter  of  history  that  from  this  struggle 
the  trust  emerged  the  victor.^  Duties  were  somewhat  reduced, 
but  they  were  still  more  than  ample.  From  1894  down  to  the 
enactment  of  the  Simmons- Underwood  bill  of  19 13,  the  duties 
on  sugar  restrained  foreign  competition,  and  thus  made  it  easier 

1  Taussig,  Some  Aspects  of  the  Tariff  Question,  pp.  103-104. 

2  Ibid.,  p.  106. 

*  See  Taussig,  Tariff  History  of  the  United  States,  fifth  edition,  pp.  305- 
314- 


112      THE  TRUST  PROBLEM  IN  THE  tJlSilTED  STATES 

for  the  trust  to  maintain  monopoly  prices.  Mr.  Havemeyer, 
the  head  of  the  sugar  trust  until  his  death  in  1907,  stated  before 
the  Industrial  Commission  that  "  the  mother  of  all  trusts  is  the 
customs  tariff  bill. "  ^  Though  this  is  certainly  not  the  whole 
truth, — the  causes  of  trusts  lie  deeper  than  this, — it  is  true  that 
the  tariff  greatly  facilitated  the  establishment  of  monopoly  con- 
ditions in  this  industry.  And  no  one  realized  this  better  than 
Mr.  Havemeyer.  The  removal  of  the  tariff  on  refined  sugar,  he 
testified,  "would  kill  the  sugar  industry. "  -  .  .  .  "It  would  inflict 
a  terrible  and  infamous  wrong  upon  100,000  people  dependent 
upon  it."  .  .  .  "It  would  permit  America  to  be  the  dumping 
ground  of  all  the  beet  sugars  of  Germany,  Austria,  France,  and 
Russia."  Such  action  would  represent  "merely  truckling  to  a 
miserable  clamor — a  bugaboo — this  babble  about  trusts."  * 
While  the  tariff  was  held  to  be  the,  mother  of  trusts,  Mr.  Have- 
meyer made  one  exception,  and  that  exception  was  the  sugar 
refining  industry."* 

Of  recent  years  the  situation  in  this  regard  has  improved. 
The  management  of  the  sugar  trust  has  changed  for  the  better, 
and  little  is  heard  of  attempts  to  dictate  tariff  legislation.  More- 
over, the  sugar  refiners  seem  to  have  undergone  a  change  of 
heart  with  respect  to  the  tariff  on  sugar.  A  high  duty  on  raw 
sugar  makes  the  growing  of  sugar  beets  more  profitable,  and 
thus  increases  the  quantity  of  sugar  refined  from  domestic 
beets  as  compared  with  cane  sugar.  High  duties  on  raw  sugar 
therefore  work  against  monopoly,  since  the  sources  of  supply 
for  beet  sugar  are  widely  scattered,  and  the  beet  factories  are 
small,  and  consequently  hard  to  control.  On  the  other  hand,  a 
low  duty  on  raw  sugar — or  none  at  all — makes  the  growing  of 
sugar  beets  unprofitable  in  many  sections,  and  thus  stimu- 
lates the  cane  sugar  branch.     The  result  is  that  we  find  some 

'  Industrial  Commission,  I,  p.  loi. 

^This  is  denied  by  Professor  Taussig.  "The  [sugar]  refining  industry, 
whetiier  or  no  it  needed  protection  in  earlier  days,  ceased  to  need  it  by  the 
close  of  the  nineteenth  century."  Some  Aspects  of  the  Tariff  Question,  p.  107. 

'Industrial  Commission,  I,  p.  115. 

*  Ibid.,  p.  loi. 


THE  AMERICAN  SUGAR  REFINING  COMPANY  113 

of  the  officials  of  the  American  Sugar  Refining  Company  in 
favor  of  disposing  of  the  beet  sugar  properties,  and  of  re- 
ducing the  tariff  on  sugar.^ 

One  of  the  worst  charges  that  may  be  made  against  the 
American  Sugar  Refining  Company  is  the  fact  that,  though  at 
times  it  practically  framed  the  sugar  schedule,  it  sought  to 
avoid  pa>Tnent  of  the  custom  duties  on  raw  sugar  by  tampering 
with  the  weighing  scales  at  the  ports  in  such  manner  as  to  regis- 
ter false  weights.  An  investigation  undertaken  by  the  govern- 
ment in  1907  resulted  in  a  suit  against  the  company  to  recover 
the  amount  of  money  stolen  from  the  government  through  false 
weighing  at  the  Brooklyn  plant.  The  evidence  in  the  suit, 
according  to  the  Attorney  General,  revealed  a  long  continued 
system  of  defrauding  the  government,  of  unparalled  depravity.^ 
The  District  Court  gave  a  judgment  ordering  the  company  to  pay 
the  United  States  $134,411,  representing  unpaid  custom  duties.^ 
Thereupon  the  company  opened  negotiations  with  the  govern- 
ment, and  in  1909  a  compromise  was  made  whereby  the  latter 
accepted  the  judgment  of  $134,411,  plus  an  additional  sum  of 
$2,000,000,  in  full  settlement  of  all  civil  liabiHties  of  the  com- 
pany for  any  underweighing  at  either  the  Brooklyn  refinery  or 
the  Jersey  City  refinery."* 

The  government  especially  reserved  the  right  to  institute 
criminal  prosecutions  against  the  officials  responsible  for  the 
underweighing.  Subsequently  suit  was  brought  against  the 
secretary  of  the  company,  and  the  general  superintendent  of  the 
Brooklyn  refinery.  Both  of  them  were  convicted  of  fraud;  and 
upon  appeal  their  conviction  was  sustained  by  the  higher  courts.^ 
The  former  was  given  a  sentence  of  eight  months'  imprisonment 
and  a  fine  of  $S,ooo  and  costs;  and  the  latter  was  given  two 
years  in  jail  and  a  fine  of  $5,000.  Both  petitioned  for  executive 
clemency,  and  by  order  of  President  Taft  the  sentence  of  the 

^Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  2052. 

2  Annual  Report  of  the  Attorney  General,  1909,  p.  12. 

*Ibid.,  p.  II. 

*Ibid.,  p.  12. 

^Ibid.,  1910,  p.  21;  1911,  p.  20;  1913,  p.  27, 


il4        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

former  was  commuted  to  fme  and  costs,  and  of  the  latter  to  30 
days  in  jail. 

The  importance  of  these  underweighing  practices,  however, 
must  not  be  exaggerated.  They  evidence  the  cupidity  of  the 
sugar  companies,  or  perhaps  the  desire  of  their  managers  to  get 
results  (and  thus  earn  their  salaries)j  but  even  if  never  discovered, 
they  would  not  have  helped  the  trust  appreciably  to  maintain 
its  position,  except  by  providing  it  with  the  sinews  of  war.  At 
best,  they  would  merely  have  enabled  it  (and  the  other  com- 
panies that  carried  on  these  practices)  to  make  somewhat  larger 
profits. 

The  American  Sugar  Refining  Company  has  also  been  guilty 
of  other  abuses.  It  has  been  the  recipient  of  special  railroad 
favors.  Freight  in  the  sugar  trade  is  an  important  item;  the 
territory  in  which  a  sugar  refining  concern  can  profitably  sell 
depends  largely  on  the  freight  rates.  Both  the  testimony  of 
officials  and  the  decisions  of  the  courts  bear  witness  to  the  fact 
that  the  American  Sugar  Refining  Company  has  obtained  rail- 
road rebates;  ^  in  fact,  the  federal  government  has  collected 
large  sums  of  money  by  way  of  fines  for  these  illegal  practices.^ 
The  company  has  also  made  use  of  local  price  discrimination, 
factor's  agreements,  and  covenants  restraining  sugar  refiners 
from  reentering  the  field.  A  special  form  of  competition  directed 
against  the  beet  sugar  companies — so  the  government  petition 
charges — was  the  practice  of  erecting  beet  sugar  factories  in  the 
neighborhood  of  proposed  independent  plants,  and  of  contract- 
ing for  all  the  available  beets  in  the  neighborhood,  thereby 
making  it  impossible  for  the  independent  factories  to  engage  in 
manufacture.^ 

The  American  Sugar  Refining  Company,  up  to  the  death  of 
Mr.  Havemeyer  in  1907,  was  a  great  advocate  of  secrecy  in 
corporate  affairs;  and  subsequent  events  made  it  clear  that  this 
policy  was  adopted  mainly  because  so  much  was  being  done 

^  See  Hearings  on  the  American  Sugar  Refining  Company,   1911-1912, 
pp. 301-302,  1419;  and  212  U.  S. 481-499. 
^Original  Petition,  p.  gi. 
=  Ibid.,  p.  147. 


THE  AMERICAN  SUGAR  REFINING  COMPANY  115 

that  could  not  bear  the  Hght  of  day.  Up  to  1907,  for  example, 
very  little  information  was  given  out  in  regard  to  the  earnings 
of  the  company.  Mr.  Havemeyer,  in  answer  to  the  queries  of 
the  Industrial  Commission,  stated  the  philosophy  which  under- 
lay this  attitude  of  the  company.  "Q. — Do  you  believe  that 
these  trusts  should  be  put  more  specifically  under  governmental 
control  than  they  are,  that  they  should  have  examination  or 
inspection  similar  to  the  national  banks?  Mr.  Havemeyer.— 
Not  at  all.  I  think  the  Government  should  have  nothing  to  do 
with  them  in  any  way,  shape,  or  manner. 

"  Q. —  You  think,  then,  that  when  a  corporation  is  chartered 
by  the  State,  offers  stock  to  the  public,  and  is  one  in  which  the 
public  is  interested,  that  the  public  has  no  right  to  know  what 
its  earning  power  is  or  to  subject  them  to  any  inspection  what- 
ever, that  the  people  may  not  buy  this  stock  blindly? 

"  Mr.  Havemeyer. — Yes;  that  is  my  theor}^  Let  the  buyer  be- 
ware; that  covers  the  whole  business.  You  can  not  wet  nurse 
people  from  the  time  they  are  born  until  the  time  they  die. 
They  have  got  to  wade  in  and  get  stuck,  and  that  is  the  way  men 
are  educated  and  cultivated. "  ^ 

Of  recent  years,  however,  the  policy  of  the  company  has 
changed.  According  to  its  officials,  its  policy  is  to  give  the 
greatest  possible  publicity  to  its  affairs. 

Railroad  favors  and  unfair  competitive  methods  thus  helped 
the  sugar  trust  to  establish  its  position.  But  undoubtedly  the 
greatest  source  of  the  sugar  trust's  strength  was  its  financial 
ability  to  buy  out  those  concerns  that  proved  themselves  able  to 
compete  successfully  with  it.  The  tariff  wall  shut  out  foreign 
competition;  all  that  was  necessary  to  retain  control  was  the 
acquisition  of  the  strongest  concerns  in  this  country.  During 
the  earlier  years  of  the  life  of  the  trust,  this  policy  of  buying  out 
competitors  proved  generally  successful,  in  spite  of  the  per- 
sistence of  these  competitors.  But  recently,  especially  with  the 
development  of  the  beet  sugar  industry,  the  American  Sugar 
Refining  Company  has  been  steadily  declining  in  relative  im- 

^  Industrial  Commission,  I,  pp.  122-123. 


Il6        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

portance.  Apparently  it  is  losing  its  right  to  be  called  a  trust, 
A  seeker  after  truth  might  properly  inquire,  why,  if  the  trust 
form  of  organisation  is  in  fact  more  efficient,  the  sugar  trust  has 
not  held  its  own  against  independent  refiners,  even  with  the 
purchase  now  and  then  (at  excessive  figures)  of  the  more 
aggressive  of  its  competitors?  Before  accepting  industrial  mo- 
nopoly as  a  natural  evolution,  he  would  be  justified  in  asking 
for  more  proof  of  the  fact  of  such  economies. 

As  to  the  influence  of  the  trust  on  prices,  the  former  head  of 
the  American  Sugar  Refining  Company  claimed  that  the  sugar 
trust  had  been  a  benefit  to  the  country;  that  it  had  reduced 
prices  to  the  consumer.  As  proof,  he  compared  the  average 
margin  ^  between  raw  and  refined  sugar  during  the  nine  years 
1879  to  1887 — the  trust  was  established  in  1887 — with  the 
average  margin  during  the  eleven  years  1888  to  1898.  His 
comparison  showed  that  whereas  the  margin  averaged  1.098 
cents  during  the  period  prior  to  the  organization  of  the  trust,  it 
averaged  only  .966  cents  during  the  period  subsequent  thereto.^ 
This  proved,  it  was  claimed,  that  the  consumer  had  benefited  by 
the  existence  of  the  trust. 

This  comparison,  however,  is  not  convincing.  The  period 
prior  to  1887,  as  the  following  table  shows,  was  one  of  high 
margins  during  the  years  1879  to  1882,  but  also  one  of  rapidly 
declining  margins.  The  scale  of  operations  was  being  greatly 
expanded,  with  a  consequent  lowering  of  costs;  and  competition 
being  active,  lower  prices  for  refined  sugar  and  lower  margins 
were  the  natural  result.  Had  Mr.  Havemeyer  compared  the 
four  years  1884  to  1887  with  the  four  years  1888  to  189 1  or  with 
the  four  years  1892  to  1895 — the  American  Sugar  Refining 
Company  was  organized  in  1891 — he  would  have  arrived  per- 
force at  the  opposite  conclusion. 

A  more  significant  study  is  the  course  of  prices  year  by  year, 

1  Because  of  the  frequent  fluctuations  in  the  price  of  raw  sugar,  the  signifi- 
cant figure  is  not  the  price  of  refined  sugar,  but  the  difference  between  the 
price  of  raw  and  refined  sugar,  known  as  the  margin.  The  margin  represents 
the  cost  of  refining,  plus  profits. 

*  Industrial  Commission,  I,  p.  103, 


THE  AMERICAN  SUGAR  REFINING  COMPANY 


117 


interpreted  in  the  light  of  the  facts  related  in  the  historical 
survey.    These  prices  are  shown  in  the  table  below. 

Price  of  Raw  and  Refined  Sugar,  and  Margin  Between  them, 
1879  TO  1914  1 


Raw 

Granu- 

Raw 

Granu- 

sugar 

lated  in 

sugar 

lated  in 

Yea 

r    testing 

barrels. 

Margin 

Yea 

r       testing 

barrels.      M 

argin 

g6°.  Per 

Per 

p6°.  Per 

Per 

pound 

pound 

pound 

pound 

1879 

7423 

8.785 

1.362 

1897 

■      3-557 

4-503 

946 

1880 

.      8 

206 

9.602 

1.396 

1898 

4 

235 

4 

965 

730 

1881 

.      8 

251 

9.667 

1 .416 

1899 

4 

419 

4 

919 

Soo 

1882 

7 

797 

9  234 

1-437 

1900 

■      4 

566 

5 

320 

754 

1883 

•      7 

423 

8.506 

1.083 

1901 

■      4 

047 

5 

050         I 

003 

1884 

■      5 

857 

6.780 

-923 

1902 

-      3 

542 

4 

455 

913 

1885 

•      5 

729 

6.441 

.712 

1903 

-      3 

720 

4 

638 

918 

1886 

•      5 

336 

6. 117 

.781 

1904 

■      3 

974 

4 

772 

798 

1887 

■      5 

245 

6.013 

.768 

1905 

4 

278 

5 

256 

978 

1888 

■      5 

749 

7.007 

1.2582 

1906 

-      3 

686 

4 

515 

829 

1889 

.      6 

433 

7.640 

1 .  207 

1907 

-      3 

756 

4 

649 

893 

1890 

5 

451 

6. 171 

.720 

1908 

4 

073 

4 

957 

884 

189 1 

■      3 

863 

4.691 

.828 

1909 

4 

007 

4 

76s 

758 

1892 

■      3 

311 

4  346 

1-035' 

1910 

■      4 

188 

4 

972 

784 

1893 

•      3 

689 

4.842 

I -153 

1911 

-      4 

453 

5 

345 

892 

1894 

3 

240 

4. 120 

.880 

1912 

4 

162 

5 

041 

879 

1895 

■      3 

270 

4152 

.882 

1913 

•      3 

506 

4 

278 

772 

1896 

•      3 

624 

4-532 

.908 

1914 

■      3 

814 

4 

683 

869 

During  the  first  four  years  shown  in  the  table  the  margin 
between  the  price  of  raw  and  refined  sugar  was  high.  Costs  were 
high,  and  the  margin  was  necessarily  high,  if  refineries  were  to 
make  a  reasonable  profit.  During  the  early  eighties,  however,  as 
shown  elsewhere,  sugar  refineries  were  much  enlarged;  and  it 
became  apparent  that  only  those  refiners  could  live  who  were  in  a 

^Industrial  Commission,  I,  p.  103;  and  Willett  and  Gray's  Weekly 
Statistical  Sugar  Trade  Journal. 

2  Trust  formed  the  year  previous. 

^  In  March  and  April  of  this  year  the  four  Philadelphia  refineries  were 
acquired. 


Il8       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

position  to  secure  the  economics  of  large-scale  production.  The 
result  of  this  movement  was  increased  output,  lower  costs,  and 
reduced  margins.  The  margin  had  been  1.362  cents  per  pound 
in  1879,  and  1.437  cents  in  1882;  by  1887  it  had  fallen  to  .768 
cents.  In  October,  1887,  the  Sugar  Refineries  Company — a 
trustee  device — became  operative,  and  the  next  year  the  margin 
rose  to  1.258  cents,  an  increase  of  almost  half  a  cent  a  pound. 
Possibly  the  margin  in  1887  was  so  low  that  even  under  competi- 
tive conditions  it  would  have  subsequently  increased,  and  there- 
fore it  may  not  be  correct  to  ascribe  all  the  advance  to  the  trust. 
Nevertheless  it  would  seem  to  be  clear  that  the  trust  did  ad- 
vance prices  in  1888,  and  that  they  were  higher  than  they  would 
have  been  had  it  not  been  for  the  trust.  In  1889  the  margin 
continued  high,  though  somewhat  less  than  in  1888.  These 
high  prices,  however,  could  not  be  maintained.  The  price  of 
refined  sugar  dropped  even  more  than  the  price  of  raw,  and  the 
margin  in  1890  was  only  .720  cents,  and  in  1891,  .828  cents.  In 
March  and  April  of  1892,  it  will  be  remembered,  the  four  Phila- 
delphia refineries  were  acquired,  and  the  American  Sugar  Refin- 
mg  Company  produced  98  per  cent  of  the  country's  output. 
The  margin  increased  from  .488  cents  per  pound  in  February  to 
.916  cents  in  March,  and  to  1.105  cents  in  April. ^  The  average 
margin  for  the  year  was  1.035  cents  in  1892,  and  1.153  cents 
in  1893  (a  panic  year).  These  high  margins  led,  even  in  a 
period  of  industrial  depression,  to  the  building  of  a  number  of 
competing  refineries;  and  this  would  seem  to  explain,  in  part  at 
least,  the  lower  margins  from  1894  to  1897.  In  1898  both  the 
Doscher  and  the  Arbuckle  refineries  began  operations.  In  that 
year  the  margin  fell  to  .730  cents,  and  in  1899  to  .500  cents. 
Mr.  Havemeyer  testified  before  the  Industrial  Commission  that 
the  decline  in  the  margin  in  1898  was  caused  by  competitors  (or 
''interlopers"  as  he  called  them)  starling  active  operations. ^ 
The  margin  for  1899  averaged  .50  cents  per  pound.    This  was 

'  Jenks,  Bulletin  of  the  Dcj)artmcnt  of  Labor,  vol.  V,  no.  29,  p.  713.  For 
weekly  quotations  see  Rei)ort  of  the  Federal  Trade  Commission  on  the  Beet 
Suf^ar  Industry  in  the  United  States,  pp.  108-122. 

2  Industrial  Commission,  I,  p.  loS. 


THE  AMERICAN  SUGAR  REFINING  COMPANY  119 

undoubtedly  below  the  actual  cost  of  refining.  Mr.  Doscher 
testified  before  the  Industrial  Commission  that  refining  then 
cost  from  .50  to  .60  cents  per  pound,  but  as  a  rule  about  .60 
cents.^  Others  placed  it  at  .63  cents,  .65  cents,  and  between  .50 
cents  and  .75  cents.-  Obviously  such  a  low  margin  could  not 
long  continue.  In  the  middle  of  1900  the  National  Sugar  Refin- 
ing Company  of  New  Jersey,  controlled  by  the  American  Sugar 
Refining  Company  and  its  stockholders,  acquired  three  of  the 
independent  concerns,  including  the  Doscher,  and  the  margin 
went  up  to  .754  cents.  The  full  effect  of  these  acquisitions  was 
not  felt,  however,  until  the  year  1901,  when  the  margin  rose  to 
1.003  cents  per  pound.  This  differential  made  the  manufacture 
of  sugar  quite  profitable,  and  as  a  result  new  refineries  were  con- 
structed. By  1902  the  margin  had  fallen  to  .913  cents.  After 
that  date  and  down  to  1914  at  least,  though  there  were  some 
fluctuations,  the  margin  showed  surprisingly  few  changes  of  any 
importance.  Mr.  Gilmore,  of  Arbuckle  Brothers,  said  in  191 1 
that  the  margin  from  1905  oji  indicated  competitive  conditions.^ 
There  was  no  longer  a  sugar  war,  he  said,  but  a  condition  of 
armed  neutrality.  Each  refiner  was  tr}dng  to  do  the  best  he 
could  for  himself,  and  meanwhile  watching  the  other  fellow 
pretty  closely.  The  cost  of  refining  cane  sugar  then  ran  from 
about  .60  to  .65  cents  per  pound;  "*  the  margin  averaged  about 
.90  cents  per  pound;  and  there  was  left  about  one-quarter  of  a 
cent  per  pound  for  profit.  The  American  Sugar  Refining  Com- 
pany, gradually  losing  control  of  the  industry,  was  unable, 
apparently,  after  1905  to  raise  the  price  much,  if  any,  above  a 
competitive  level. 

The  dividends  of  the  American  Sugar  Refining  Company  point 
to  monopoly  prices  during  the  period  when  the  company  was  at 
the  height  of  its  power,  and  to  the  leveling  effect  of  competition 
on  prices. 

'  Industrial  Commission,  I,  pp.  88,  94. 

2  Ibid., pp.  112,  150;  Hearings  on  the  .American  Sugar  Refining  Company, 
19H-1912,  p.  1134. 

'  Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  p.  1140. 
^Ibid.j  pp.  1149,  1986,  2260;  and  Original  Petition,  p.  34. 


I20       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Since  its  organization  in  1891  the  American  Sugar  Refining 
Company  has  regularly  paid  7  per  cent  on  its  preferred  stock  and 
the  following  rates  on  its  common  stock : 

Common  Stock  DrvroENDS  of  the  American  Sugar  Refining  Company, 

)i-i9iS 


Just  how  much  water  there  was  in  the  stock  can  not  be  stated 
with  certainty.  The  capitalization  of  the  companies  that  went 
into  the  trust  in  1887  was  $6,590,000;^  the  amount  of  trust 
certificates  issued  in  1887  and  of  stock  in  1891  was  $50,000,000, 
minus  15  per  cent  treasury  stock.  The  capitalization  of  the 
trust  thus  exceeded  the  capitalization  of  the  constituent  com- 
panies by  more  than  six  times.  But  according  to  Mr.  Havemeyer 
the  constituent  companies  were  undercapitalized;  their  assets 
were  worth  much  m.ore  than  the  amount  of  the  capitalization. 
The  Industrial  Commission  in  its  review  of  evidence  states  that 
the  American  Sugar  Refining  Company,  beyond  question,  was 
capitalized  at  a  sum  at  least  twice  as  large  as  the  cost  of  recon- 
structing the  plants  in  1899  to  1900,  and  the  cost  of  building  was 
then  very  much  higher  then  than  it  had  been  at  an  earlier  date.^ 
The  value  of  the  brands,  which  was  considerable,  must  not, 
however,  be  overlooked.  While  an  accurate  estimate  of  the 
extent  to  which  the  capital  stock  of  the  trust  represented  prop- 
erty, and  the  extent  to  which  it  represented  the  hope  of  monopoly 

•  Lexow  Report  (1897),  p.  384. 

^Industrial  Commission,  I,  p.  13  (Review  of  Evidence). 


THE  AMERICAN  SUGAR  REFINING  COMPANY  121 

gains,  can  not  be  made,  there  is  no  doubt  that  the  amount  of 
water  was  considerable.  The  Court  of  Appeals  of  New  York 
state  referred  to  the  stock  of  the  Sugar  Refineries  Company 
(the  sugar  "trust")  as  being  "heavily  watered."  and  "proudly 
defiant  of  actual  values; "  ^  and  Mr.  Oxnard  admitted  that  when 
his  company  joined  the  trust  in  1887  it  received  $750,000  of 
trust  certificates  for  property  worth  $200,000,  and  capitalized 
at  $100,000.'' 

It  is  evident  that  the  profits  of  the  American  Sugar  Refining 
Company  during  perhaps  the  first  ten  years  of  its  existence  were 
enormous.  In  1893,  after  98  per  cent  of  the  industry  had  been 
acquired,  the  dividends  paid  on  the  common  stock  were  22  per 
cent — a  much  larger  per  cent,  as  a  matter  of  course,  on  a  reason- 
able capitalization.  From  1894  through  1899,  12  per  cent 
dividends  were  regularly  paid.  Since  1900  the  profits  and  divi- 
dends have  been  much  less.  The  company  has  been  unable  to 
charge  monopoly  prices  during  the  greater  part  of  the  period 
since  1900,  and  from  1901  to  1915  only  7  per  cent  was  paid  on  the 
common, — not  so  meager,  after  all,  the  actual  investment  being 
taken  into  consideration. 

It  might  seem  as  if  the  difference  between  monopoly  prices 
and  competitive  prices  is  so  small  that  the  matter  is  not  of  much 
consequence  to  the  public.  The  margin  at  its  highest  after  the 
organization  of  a  sugar  trust  was  1.258  cents  per  pound  (1888); 
and  the  normal  margin  under  more  or  less  competitive  conditions 
was  about  nine-tenths  of  a  cent.  The  difference,  therefore,  is 
only  about  one-third  of  a  cent  per  pound.  But  this  small  sum 
amounts  to  a  great  deal  in  the  aggregate.  The  total  consumption 
of  refined  sugar  in  the  United  States  in  1915  was  3,648,108  long 
tons,  or  8,171,761,920  pounds.  Of  this  amount,  34.06  per  cent, 
or  2,783,302,109  pounds,  was  refined  by  the  American  Sugar 

1 121  New  York  Reports  614,  625. 

2  Hearings  on  the  American  Sugar  Refining  Company,  191 1-191 2,  pp.  371- 
373.  A  committee  of  the  House  investigating  the  American  Sugar  Refining 
Company  declared  that  the  real  value  of  the  properties  acquired  by  the  trust 
in  1887  was  not  over  twenty  to  twenty-five  millions.  House  Report  no.  331. 
62nd  Cong.,  2nd  Sess.,  p.  25. 


122       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Refining  Company.  Had  the  company  been  able  to  get  one- 
third  of  a  cent  more  for  its  output  (as  in  the  halcyon  days  after 
the  formation  of  the  trust),  its  profits  would  have  been  increased 
by  $9,277,720;  and  had  all  this  sum  been  disbursed  in  dividends, 
the  dividend  rate  on  the  (heavily  watered)  common  stock  could 
have  been  increased  from  7  per  cent  to  over  27  per  cent. 

At  this  point  the  presentation  of  facts  respecting  this  trust 
may  properly  close,  and  the  reader  may  ponder  for  himself  on  the 
problem  involved  in  the  collection  of  a  toll  (in  small  amounts 
from  each  but  enormous  in  the  aggregate)  from  millions  of  people 
by  a  trust  which  has  been  for  a  generation  a  noted  recipient  of 
tariff  favors. 


CHAPTER  VII 

THE  AMERICAN  TOBACCO  COMPANY  ^ 

The  history  of  the  tobacco  trust  begins  with  the  organization 
of  the  American  Tobacco  Company  in  1890.  After  1887,  at- 
tempts had  been  made  to  consoUdate  some  of  the  leading  manu- 
facturers of  cigarettes,  but  these  efforts  proved  unsuccessful 
until  1890.-  On  January  21  of  that  year  the  American  Tobacco 
Company  was  incorporated  in  the  state  of  New  Jersey,  with  a 
capital  of  $25,000,000, — $15,000,000  common,  and  $10,000,000 
preferred.^  The  American  Tobacco  Company  was  a  consolida- 
tion of  five  of  the  leading  manufacturers  of  cigarettes,  producing 

'  On  the  tobacco  trust  see:  Report  of  the  Commissioner  of  Corporations  on 
the  Tobacco  Industry,  part  I,  Position  of  the  Tobacco  Combination  in  the 
Industry  (February  25,  1909),  part  II,  Capitalization,  Investment,  and 
Earnings  (September  25,  191 1),  and  part  III,  Prices,  Costs  and  Profits 
(March  15,  1Q15);  Original  Petition  in  United  States  v.  American  Tobacco 
Company  et  al.;  Transcript  of  Record,  in  five  volumes,  in  United  States  v. 
American  Tobacco  Company  et  al.  (no.  660),  and  in  American  Tobacco 
Company  et  al.  v.  United  States  (no.  661);  Brief  for  the  United  States  in 
United  States  v.  American  Tobacco  Company  et  al.  (no.  118),  and  in  Ameri- 
can Tobacco  Company  et  al.  v.  United  States  (no.  119);  164  Fed.  Rep. 
700-728;  191  Fed.  Rep.  371-431;  221  U.  S.  106-193;  Industrial  Commission, 
vol.  XIII,  pp.  305-342;  Report  of  Joint  Committee  of  the  Senate  and  As- 
sembly appointed  to  investigate  trusts,  transmitted  to  the  New  York  State 
Legislature,  March  9,  1897  (Lexow  Report),  pp.  860-926,  983-998;  Jacob- 
stein,  The  Tobacco  Industry  in  the  United  States. 

2  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  I,  pp.  64-65.    Referred  to  hereafter  as  Report  on  the  Tobacco  Industry. 

*  The  fair  value  of  the  tangible  assets  acquired  by  the  American  Tobacco 
Company  was  $3,545,108  plus  notes  of  the  organizers  amounting  to  $1,825,- 
354,  a  total  of  $5,370,462.  The  balance  ($19,629,538)  might  be  regarded  as 
representing  good  will.  The  Bureau  of  Corporations,  however,  found  the 
good  will  to  be  worth  only  $8,954,892.  The  overcapitalization,  therefore, 
was  very  marked.    See  Report  on  the  Tobacco  Industry,  part  II,  p.  8. 

123 


124      THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

in  the  aggregate  95  per  cent  of  the  country's  output  of  cigarettes.^ 
It  thus  possessed  a  high  degree  of  monopolistic  control.  The 
leading  concern  was  W.  Duke,  Sons  and  Company,  controlled 
by  Mr.  James  B.  Duke.  Under  Mr.  Duke's  management  the 
output  of  this  concern  had  increased  from  approximately 
30,000,000  cigarettes  in  1883  to  940,000,000  in  1889.^  Mr.  Duke 
testified  that  his  company  prior  to  the  organization  of  the  com- 
bination did  about  40  per  cent  of  the  cigarette  business  of  the 
country.^  The  other  four  concerns  had  been  prospering,  and 
had  been  increasing  their  output  rapidly."*  Competition  among 
them,  it  is  true,  had  been  quite  vigorous.  Very  extensive  adver- 
tising had  been  resorted  to,  and  large  premiums  had  been  given 
to  merchants  and  consumers.  The  Duke  concern  alone  had 
expended  $800,000  in  advertising  and  premiums  in  1889.  These 
heavy  selling  expenses  had  greatly  reduced  the  profits  of  the  five 
companies,  and  had  undoubtedly  promoted  the  establishment 
of  a  combination.  But  there  is  little  reason  to  believe  that  this 
competition  had  been  ruinous  to  the  parties  concerned.  The 
firm  of  W.  Duke,  Sons  and  Company  which,  according  to  its 
president,  was  worth  only  about  $250,000  in  1885,  was  worth 
$7,500,000  in  1889.^  Certainly  the  leading  concern  found  the 
profits  enormous,  despite  the  great  outlays  for  competitive 
purposes. 

Having  effected  a  monopolistic  position  the  American  Tobacco 
Company  sought  to  maintain  this  position  by  entering  into 
agreements  for  the  exclusive  use  of  the  best  cigarette  machines; 
in  fact,  the  possibility  of  acquiring  exclusive  control  over  these 

1 221  U.  S.  156. 

2  Transcript  of  Record  in  United  States  v.  American  Tobacco  Company 
(no.  660),  vol.  IV,  p.  335. 

*  Ibid.,  p.  337.  During  the  ten  years  prior  to  1890  the  business  of  making 
cigarettes  was  revolutionized  through  the  introduction  of  patented  machines 
(Original  Petition  in  United  States  v.  American  Tobacco  Company,  p.  13), 
and  this,  no  doubt,  is  a  partial  explanation  of  the  ability  of  one  company  to 
gather  to  itself  such  a  large  percentage  of  the  countrj^'s  business. 

■•  Original  Petition  in  United  States  v.  AmericanTobacco  Company,  p.  14. 

^  Transcript  of  Record  in  United  States  v.  American  Tobacco  Company 
(no.  660),  vol.  IV,  pp.  334,  337. 


THE  AMERICAN  TOBACCO  COMPANY  125 

machines  was  one  of  the  inducements  to  the  formation  of  the 
company.^  The  importance  of  machinery  in  the  manufacture 
of  cigarettes  is  made  clear  by  a  report  of  the  Commissioner  of 
Labor.  In  1876  the  labor  cost  of  a  cigarette  made  by  hand  was 
96.4  cents  per  thousand;  in  1895  for  the  same  cigarette  made  by 
machinery  it  was  only  8.1  cents  per  thousand.^  Among  the  best 
cigarette  machines  was  the  Bonsack,  and  the  American  Tobacco 
Company  almost  immediately  upon  its  organization  entered  into 
a  contract  for  the  exclusive  use  during  a  period  of  three  years 
of  the  cigarette  machines  of  the  Bonsack  Machine  Company.^ 
The  Bonsack  Company,  as  a  part  of  the  contract,  terminated  its 
outstanding  agreements  with  all  other  manufacturers  of  cigar- 
ettes. This  exclusive  control  of  the  Bonsack  machines  was, 
the  Commissioner  of  Corporations  believes,  the  principal  factor 
in  the  extraordinary  success  of  the  American  Tobacco  Company 
from  1890  to  1895.'*  Toward  the  close  of  1895,  however,  the 
Bonsack  Company,  by  adverse  court  decisions,  was  deprived  of 
its  exclusive  rights  to  the  most  important  parts  of  the  machine, 
and  as  a  result  the  American  Tobacco  Company  lost  the  ad- 
vantage of  this  artificial  prop.  The  American  Tobacco 
Company  likewise  secured  possession  of  the  patents  on  the 
Allison  machine,  and  was  thus  able  to  prevent  its  use  by 
its  competitors.  Other  patents  and  machines  in  considerable 
number  were  acquired  by  the  American  Tobacco  Company  after 
its  organization,  the  purpose  in  some  cases  being  to  utilize  these 
patents  and  machines,  in  other  cases  to  prevent  their  utilization 
by  competitors. 

In  addition  to  the  endeavor  to  maintain  its  position  by  mon- 
opolizing the  machinery  for  the  manufacture  of  cigarettes,  the 
cigarette  trust  employed  another  policy, — a  policy  which  it 
continued  throughout  its  whole  career.  This  was  the  acquisition, 
at  high  prices  if  necessary,  of  its  most  vigorous  competitors. 
Cigarette  companies  in  considerable  numbers  were  acquired 

^  Report  on  the  Tobacco  Industry,  part  I,  p.  64. 

*  Thirteenth  Annual  Report  of  the  Commissioner  of  Labor  (1898),  p.  73. 

^  Report  on  the  Tobacco  Industr>',  part  I,  pp.  67,  266. 

^  Ibid.,  part  I,  p.  266. 


126       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

after  1890,  as  a  means  of  retaining  the  monopolistic  position 
originally  attained.^  The  plants  thus  acquired  were  generally 
closed;  and  the  brands,  though  sometimes  utilized,  were  usually 
withdrawn.^  Frequently  the  owners  of  the  plants  acquired  were 
compelled  to  sign  an  agreement  not  to  reenter  the  tobacco 
business  again  for  a  number  of  years.^ 

The  next  trust  in  the  tobacco  industry  was  formed  in  the  plug 
branch.  By  the  purchase  of  the  National  Tobacco  Works  in 
1 89 1  the  American  Tobacco  Company  had  acquired  several 
popular  plug  brands.  In  1893,  Mr.  James  B.  Duke,  president  of 
the  American  Tobacco  Company,  endeavored  to  engineer  a  com- 
bination of  plug  tobacco  concerns.^  Not  proving  successful  in 
this,  the  American  Tobacco  Company  in  1894  began  an  aggres- 
sive campaign  for  the  control  of  the  plug  business.  As  a  part  of 
the  competitive  warfare,  prices  were  cut  below  cost.''  The 
principal  brand  made  use  of  in  this  fight  was  appropriately 
termed  "  Battle  Ax."  In  1891  this  brand  had  retailed  at  50  cents 
per  pound;  in  1894  the  price  was  reduced  to  30  cents.^  This 
policy  of  price  cutting  was  accompanied  by  an  advertising  cam- 
paign, which  was  pushed  most  vigorously  in  the  territory  of  the 
leading  competitors.  In  some  sections,  indeed,  agents  of  the 
American  Tobacco  Company  presented  every  man  they  met 
with  a  free  sample  of  " Battle  Ax."  By  such  means,  the  Ameri- 
can Tobacco  Company,  aided  as  it  was  by  the  advantages  en- 
joyed through  its  control  of  the  cigarette  trade,  was  able  to 
increase  its  sales  of  plug  tobacco  from  9,000,000  pounds  in  1894 
to  38,000,000  pounds  in  1897;  and  its  proportion  of  the  total 
production  from  5.6  per  cent  to  20.9  per  cent.^ 

1  For  an  account  of  the  cigarette  concerns  acquired  from  1890-1904, 
see  Report  on  the  Tobacco  Industry,  part  I,  pp.  67-71,  7Q-93- 

2  Brief  for  United  States  in  United  States  v.  American  Tobacco  Company 
(nos.  118,  119),  p.  9. 

*  Testimony  of  IMr.  James  B.  Duke  before  Industrial  Commission,  XIII, 

p.  323- 

*  Original  Petition  in  United  States  v.  American  Tobacco  Company,  p.  25. 

*  221  U.   S.   160. 

*  Report  on  the  Tobacco  Industry,  part  I,  p.  96. 
'  Ibid.,  pp.  97-98. 


THE  AMERICAN  TOBACCO  COMPANY  127 

This  expansion  of  its  operations,  however,  was  expensive. 
During  the  four  years  from  1895  to  1898,  the  American  Tobacco 
Company  sustained  losses  on  its  phig  business  amounting  to 
more  than  $3,300,000.^  This  competition  was  ruinous,  especially 
to  the  concerns  unable  to  make  up  their  losses  in  the  plug  branch 
out  of  the  enormous  profits  of  the  cigarette  branch.  It  was 
ruinous,  not  because  competition  is  naturally  or  inevitably 
ruiribus,  but  because  the  cigarette  trust  was  deliberately  man- 
oeuvring to  force  the  manufacturers  of  plug  tobacco  into  a  com- 
bination. By  early  in  1S98  the  outside  manufacturers  had  been 
brought  into  the  proper  frame  of  mind;  they  had  come  to  favor  a 
combination  as  a  means  of  obtaining  relief  from  the  attacks  on 
their  business.  The  first  plan  for  a  combination  fell  through, 
however,  partly  because  the  promoters  feared  that  the  Spanish- 
American  War,  with  its  increased  revenue  taxes,  would  seriously 
affect  the  profitableness  of  the  combination.  The  American 
Tobacco  Company  thereupon,  in  the  fall  of  1898,  purchased  two 
more  important  plug  companies,  and  apparently  was  about  to 
give  its  rivals  another  taste  of  cutthroat  competition.  These 
purchases  undoubtedly  hastened  the  movement  for  the  estab- 
lishment of  a  combination  of  the  leading  plants.  By  October, 
1898,  the  definite  announcement  was  made  that  a  consolidation 
of  the  leading  plug  plants  would  be  formed,  including  those 
owned  by  the  American  Tobacco  Company.  The  name  of  the 
consolidated  company  was  the  Continental  Tobacco  Company; 
and  it  was  incorporated  in  New  Jersey  on  December  10,  1898, 
■with  an  authorized  capital  of  $75,000,000.^  The  new  plug  com- 
bination embraced  nearly  every  important  navy  plug  concern  in 
the  country,  including  the  firm  of  P.  Lorillard.^  But  the  com- 
bination did  not  include  the  Liggett  and  Myers  Tobacco  Com- 
pany, possessing  the  largest  single  plant  of  any  plug  concern. 
And  without  the  Liggett  and  Myers  plant  the  Continental 
Tobacco  Company  could  hardly  carry  out  its  purpose,  which  was 

^  Report  on  the  Tobacco  Industry,  part  I,  p.  367. 
^  Ibid.,  pp.  99-100. 

^Ibid.  For  an  explanation  of  the  terms  "navy"  plug  and  "flat"  plug, 
see  Report  on  the  Tobacco  Industry,  part  III,  pp.  45-46. 


128        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  monopolization  of  the  plug  business.  This  fact  was  clearly 
realized,  and  the  attempt  was  consequently  made  to  acquire  this 
concern,  though  at  first  without  success. 

The  inability  to  secure  control  of  this  company  was  due  to 
the  opposition  of  an  element  in  its  management  which  had 
planned  a  raid  on  the  plug  combination.  In  October,  1898,  a 
syndicate,  consisting  of  Mr.  Thomas  Fortune  Ryan,  Mr.  P.  A.  B, 
Widener,  and  Mr.  Anthony  N.  Brady,  among  others,  acquired 
the  National  Cigarette  and  Tobacco  Company,  the  only  real 
rival  of  the  American  Tobacco  Company  in  the  cigarette  busi- 
ness.^ In  the  same  month  the  syndicate  organized  the  Union 
Tobacco  Company  of  America;  and  this  company  took  over  the 
stock  of  the  National  Company.  In  December,  1898,  the  Union 
Tobacco  Company  purchased  86  per  cent  of  the  stock  of  the 
Blackwell's  Durham  Tobacco  Company,  one  of  the  leading 
independent  smoking  tobacco  concerns.  Early  in  1899  it  became 
known  that  the  organizers  of  the  Union  Tobacco  Company  held 
an  option  on  a  majority  of  the  stock  of  the  Liggett  and  Myers 
Tobacco  Company.  The  men  who  had  promoted  the  Union 
Tobacco  Company  apparently  reasoned  that  a  powerful  concern 
standing  outside  the  combination  would  be  in  a  position  to  exact 
a  good  price  as  a  condition  of  joining  it;  and  the  company  was 
clearly  strong  enough  financially  to  cause  great  loss  to  the  combi- 
nation, should  a  struggle  actually  take  place.  This  fact  was  well 
realized  by  the  dominant  interests  in  the  cigarette  and  plug 
combinations,  and  in  1899  the  Continental  Tobacco  Company 
purchased  at  a  very  high  figure  the  Union  Tobacco  Company, 
and  with  it  secured  the  Liggett  and  Myers  concern.^  Mr.  Duke 
testified  subsequently  that  the  purpose  in  buying  the  Union 
Tobacco  Company  was  to  bring  into  the  fold  the  wealthy  finan- 
ciers who  had  promoted  it;  that  the  American  Tobacco  "crowd" 
was  not  strong  enough  financially.^  As  a  matter  of  fact,  the  men 
who  controlled  the  Union  Tobacco  Company  did  shortly  there- 

^  Report  on  the  Tobacco  Industr>',  part  I,  pp.  73-74- 

2  Ibid.,  p.  100. 

3  Transcript  of  Record  in  United  States  v.  Anaerican  Tobacco  Company 
(no.  660),  vol.  IV,  p.  367. 


THE  AMERICAN  TOBACCO  COMPANY  i2Q 

after  enter  the  directorate  of  either  the  American  Tobacco 
Company  or  the  Continental  Tobacco  Company,  and  they  be- 
came thenceforth  very  important  factors  in  the  control  of  the 
whole  Tobacco  Combination.  With  the  acquisition  of  Liggett 
and  Myers  the  Continental  Tobacco  Company  produced  56.3 
per  cent  of  the  country's  output  of  plug  tobacco;  and  thus 
attained  a  considerable  degree  of  monopoly  control, — a  control 
later  much  increased.^  From  the  outset  the  Continental  To- 
bacco Company  was  dominated  by  the  .\merican  Tobacco  Com- 
pany interests,  though  the  American  Tobacco  Company  itself 
held  only  about  one-third  of  the  company's  stock. ^  Such  stock 
as  it  held  it  had  received  in  exchange  for  the  plug  business  which 
it  had  developed,  and  which  it  had  turned  over  to  the  Conti- 
nental Tobacco  Company. 

The  formation  of  the  Continental  Tobacco  Company,  domi- 
nated as  it  was  by  the  American  Tobacco  Company,  added 
greatly  to  the  Combination's  control  of  the  smoking  tobacco 
business.  From  the  very  beginning  the  American  Tobacco 
Company  had  produced  some  smoking  tobacco;  it  had  inherited 
this  business  from  its  constituent  concerns,  each  of  which  manu- 
factured several  brands  of  smoking  tobacco.  In  1891  two  addi- 
tional smoking  tobacco  concerns  were  acquired.  As  the  result  of 
these  purchases  the  American  Tobacco  Company  produced  in 
1891,  18  per  cent  of  the  country's  output  of  smoking  tobacco. 
During  the  next  few  years,  the  plug  business  especially  was  being 
developed;  and  by  1897  the  American  Tobacco  Company,  de- 
spite several  acquisitions,  had  increased  its  proportion  of  the 
smoking  tobacco  business  to  only  22.7  per  cent.  However, 
several  of  the  companies  acquired  by  the  Continental  Tobacco 
Company  in  1898  and  1899  produced  smoking  tobacco  as  well  as 
plug,  and  the  result  was  that  by  1900  the  combined  production  of 
the  American  Tobacco  Company  and  the  Continental  Tobacco 
Company  amounted  to  59.2  per  cent  of  the  total  output.    This 

^  Report  on  the  Tobacco  Industry,  part  I,  p.  365.  For  an  account  of  the 
acquisitions  of  the  Continental  Tobacco  Company  from  1899-1904,  see 
Report  on  the  Tobacco  Industry,  part  I,  pp.  103-113. 

^  Ibid.,  p.  102, 


I30        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

gave  the  Tobacco  Combination  a  very  strong  hold  on  this 
branch, — a  hold  which  was  subsequently  extended. 

Another  branch  in  which  the  Combination  increased  its 
business  was  the  production  of  fine-cut  tobacco, — a  form  of 
tobacco  used  for  chewing.  From  1890  to  1S98  the  production  of 
fine-cut  tobacco  by  the  Combination  was  very  small;  it  never 
exceeded  6  per  cent  of  the  total. ^  But  with  the  organization  of 
the  Continental  Tobacco  Company,  several  of  whose  constituent 
companies  produced  considerable  amounts  of  fine-cut  tobacco, 
and  with  several  minor  acquisitions  about  the  same  time  by  the 
American  Tobacco  Company,  the  Combination's  percentage  of 
the  business  had  increased  by  1900  to  50.5  per  cent, — a  percent- 
age greatly  increased  subsequently. 

Shortly  after  the  organization  of  the  Continental  Tobacco 
Company,  the  dominant  interests  in  the  cigarette  and  plug  trusts 
organized  a  snuff  trust.  Since  1891  the  American  Tobacco 
Company  had  produced  a  small  quantity  of  snuff,  and  in  1899  it 
purchased  some  additional  snuff  concerns.  The  Continental  in 
1898  had  acquired  the  large  snuff  business  of  P.  Lorillard  and 
Company.  The  American  and  Continental  companies  between 
them  sold  in  1899  about  32  per  cent  of  all  the  snuff  sold  in  the 
country.^  This,  however,  was  well  under  the  sales  of  the  Atlantic 
Snuff  Company,  a  combination  in  1898  of  four  concerns  produc- 
ing among  them  46.5  per  cent  of  the  total  output  of  snuff. ^ 
To  get  control  of  the  snuff  business,  therefore,  it  was  necessary  to 
wage  a  competitive  campaign  against  the  snuff  combination. 
In  1899,  then,  the  American  and  Continental  Companies  greatly 
reduced  the  price  on  some  of  the  leading  brands  of  snuff,  in  the 
face  of  a  doubling  of  the  internal  revenue  tax;  and  they  also  gave 
away  large  quantities  of  snuff  to  prospective  customers.  The 
snuff  combination  followed  suit,  and  until  early  in  1900  competi- 
tion was  quite  vigorous.  A  combination  was  then  decided  upon. 
On  March  12,  1900,  the  American  Snuff  Company  was  incor- 
porated in  the  state  of  New  Jersey.    It  took  over  the  snuff  busi- 

'  Report  on  the  Tobacco  Industry,  part  I,  p.  408. 
2  Ibid.,  part  III,  p.  138. 
*  Ibid.,  part  I,  p.  141. 


THE  AMERICAN  TOBACCO  COMPANY  131 

ness  of  the  Atlantic  Snuff  Company,  the  American  Tobacco 
Company,  the  Continental  Tobacco  Company,  and  the  George 
W.  Helme  Company.^  The  output  of  the  American  Snuff 
Company  in  1901,  its  first  full  year's  business,  amounted  to  80.2 
per  cent  of  the  total  output  of  snuff.^  It  thus  secured  a  mo- 
nopolistic position  in  the  industry, — an  accomplishment  that  was 
facilitated  because  of  the  fact  that  the  greater  part  of  the  busi- 
ness was  already  concentrated  in  the  hands  of  a  few  concerns. 
Over  43  per  cent  of  the  stock  of  the  American  Snuff  Company  at 
its  organization  was  given  to  the  American  Tobacco  Company 
and  to  the  Continental  Tobacco  Company  in  exchange  for  their 
snuff  business.^  This  was  only  a  minority,  but  in  view  of  the 
fact  that  large  stockholders  of  the  American  Tobacco  Company 
also  held  stock  in  the  American  Snuff  Company  it  amounted  to 
control. 

By  1900,  therefore,  -the  Tobacco  Combination  had  reached  a 
dominant  position  in  the  manufacture  of  all  the  important 
branches  of  tobacco  except  cigars.  It  produced  92.7  per  cent  of 
the  output  of  cigarettes;  62  per  cent  of  the  plug  tobacco;  59.2 
per  cent  of  the  smoking  tobacco;  50.5  per  cent  of  the  fine- 
cut  tobacco;  and  78.0  per  cent  of  the  snuff  (80.2  per  cent  in  1901). 

The  Combination  next  directed  its  attention  to  the  cigar  busi- 
ness, the  most  important  of  all  the  branches  of  tobacco  manu- 
facture.^ The  American  Tobacco  Company  had  entered  the 
cheroot  branch  of  cigar  making  in  1891  by  the  purchase  of  the 
business  of  P.  Whitlock,  the  manufacturer  of  ''Old  Virginia 
Cheroots";  but  for  some  time  thereafter  it  made  no  ordinary 
cigars.  Shortly  after  the  organization  of  the  Continental  To- 
bacco Company,  the  American  Tobacco  Company  made  plans  to 
engage  in  the  manufacture  of  cigars.  As  the  first  step  in  that 
direction,  it  began  experimenting  with  cigar  making  machines; 

1  Report  on  the  Tobacco  Industry,  part  I,  pp.  143-144.  The  subsequent 
acquisitions  of  the  company  are  shown  on  pp.  146-148. 

2  Ibid.,  part  III,  p.  138. 

3  Ibid.,  part  I,  p.  143. 

*The  value  of  cigars  in  1904  was  almost  60  per  cent  of  the  total  value  of  all 
the  manufactured  products  of  tobacco.  Report  on  the  Tobacco  Industry, 
part  I,  p.  50. 


132        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

its  control  of  the  machines  for  making  cigarettes  had  shown  it 
the  advantage  of  producing  with  the  aid  of  machinery,  and  of 
controlhng  the  patents  on  the  machinery.  But  no  particular 
success  crowned  its  efforts  in  this  direction;  and  even  to-day 
machinery  is  not  much  used  except  in  the  manufacture  of 
the  cheaper  grades  of  cigars.^  In  spite  of  its  lack  of 
success,  in  this  direction,  however,  it  determined  to  or- 
ganize a  cigar  company,  and  to  go  after  the  cigar  busi- 
ness. Accordingly  on  January  12,  1901,  the  American  Cigar 
Company  was  incorporated  in  the  state  of  New  Jersey.^  Over 
70  per  cent  of  its  stock  was  subscribed  to  by  the  American 
Tobacco  Company  and  the  Continental  Tobacco  Company.  The 
American  Cigar  Company  took  over  the  greater  part  of  the  cher- 
oot and  little  cigar  business  of  the  American  Tobacco  Company, 
and  soon  purchased  a  number  of  cigar  concerns,  including  the 
Havana-American  Tobacco  Company,  itself  a  combination  of 
cigar  companies.  These  acquisitions  made  the  American  Cigar 
Company  the  largest  manufacturer  of  cigars  in  the  country;  in 
1901  it  produced  10.9  per  cent  of  the  total  output  of  cigars  (not 
including  Httle  cigars).^  During  1901-1903  the  American  Cigar 
Company  made  a  determined  attempt  to  monopolize  the  busi- 
ness. Prices  were  reduced,  cigars  given  away,  an  extensive  ad- 
vertising campaign  carried  on,  and  expensive  retail  stores  fitted 
up."*  By  such  means  the  leading  interests  in  the  Tobacco  Com- 
bination apparently  hoped  to  duplicate  their  success  in  the  other 
branches.  But  this  campaign  proved  unsuccessful.  Enormous 
losses  were  incurred,  and  though  the  output  of  the  American  Cigar 
Company  was  considerably  increased,  it  manufactured  only  16.4 
per  cent  of  the  total  output  in  1903,  and  even  less  in  the  years 
that  followed.^ 

The  explanation  of  this  failure  to  control  the  industry  is  not 
hard  to  find.    In  the  manufacture  of  such  products  as  cigarettes, 

'  Report  on  the  Tobacco  Industry,  part  I,  p.  6. 

^Ibid.,  p.  151. 

'  See  p.  144. 

■*  Report  on  the  Tobacco  Industry,  part  I,  p.  420. 

*  See  p.  144. 


THE  AMERICAN  TOBACCO  COMPANY  133 

plug  tobacco,  and  smoking  tobacco,  machinery  is  extensively 
used.  Even  before  a  combination  was  formed,  there  was  a 
decided  concentration  of  the  business  in  the  hands  of  a  few  con- 
cerns; and  to  bring  together  these  concerns  was  not  particularly 
difficult,  especially  in  the  face  of  the  pressure  that  was  brought 
to  bear  on  the  recalcitrant.  But  then  (as  now)  a  very  large  pro- 
portion of  the  cigars  was  made  by  hand.  Even  when  machinery 
was  used,  it  was  of  much  less  importance  than  in  the  other 
branches  of  tobacco  manufacture.  Because  of  the  fact  that 
machinery  played  little  part,  small  establishments  were  at  no 
great  disadvantage  as  compared  with  large  ones.  A  cigar  factory 
could  be  started  with  small  capital,  and  naturally  there  were — 
and  are — a  great  many  plants.  For  these  reasons  it  was  difficult 
to  establish  an  effective  cigar  combination,  and  even  if  one 
should  be  established  it  would  prove  well-nigh  impossible  for  it  to 
maintain  control  of  the  industr}^  Economic  conditions  in  this 
branch  of  the  trade  have  thus  been  such  as  to  thwart  the  designs 
of  the  trust  promoters. 

The  next  important  combination  in  the  tobacco  industry  was 
the  Consolidated  Tobacco  Company,  a  holding  company  organ- 
ized on  June  5,  1901,  to  unite  the  American  Tobacco  Company 
and  the  Continental  Tobacco  Company, — the  two  principal 
companies  in  the  Tobacco  Combination.  Immediately  upon  its 
organization  the  Consolidated  Company,  promoted  by  some  of 
the  leading  financial  interests  in  the  tobacco  combinations,  of- 
fered to  exchange  its  4  per  cent  bonds  in  equal  amounts  for  the 
common  stock  of  the  Continental  Tobacco  Company,  and  at  the 
rate  of  2  to  i  for  the  common  stock  of  the  American  Tobacco 
Company.^  This  offer  was  generally  accepted  by  the  stock- 
holders. The  result  was  to  give  more  complete  control  over  the 
business  to  the  few  financiers  who  already  rather  effectively  con- 
trolled the  management.  At  the  time,  the  exchange  of  their  com- 
mon stock  for  the  bonds  of  the  holding  company  had  seemed  to 
the  stockholders  to  be  quite  profitable.  The  common  stock  of 
the  Continental  Tobacco  Company  had  never  borne  a  dividend, 
and  during  a  considerable  period  had  sold  below  $30  per  share; 
^  Report  on  the  Tobacco  Industry,  part  I,  pp.  114-115. 


134       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  holders  were  now  assured  4  per  cent  regularly.^  The  common 
stock  of  the  American  Tobacco  Company,  highly  watered  as  it 
was,  especially  since  the  declaration  of  a  100  per  cent  stock  div- 
idend in  1899,  paid  only  6  per  cent,  and  was  earning  about  9  per 
cent.^  By  the  exchange  an  8  per  cent  return  was  practically  guar- 
anteed. Yet  the  organizers  and  stockholders  of  the  Consolidated 
Tobacco  Company  made  enormous  profits.  They  apparently  be- 
lieved that  the  profits  of  the  business  would  be  much  greater  in 
the  future  than  they  had  been  up  to  that  time.  One  reason  for 
this  behef  was  the  probable  removal  of  the  Spanish-American 
War  taxes  on  tobacco  products,  and  the  conviction  that  it  would 
not  be  necessary,  in  view  of  the  control  the  Combination  pos- 
sessed over  the  industry,  to  reduce  prices  by  the  amount  of  the 
tax.^  As  a  matter  of  fact,  the  taxes  were  removed,  and  the  prof- 
its did  increase  enormously.  And  these  profits  largely  went,  of 
course,  not  to  the  bondholders,  but  to  the  few  men  who  held  the 
stock  of  the  Consolidated  Tobacco  Company.  Over  half  of  the 
stock  of  this  company,  in  fact,  was  held  by  six  men, — Messrs. 
James  B.  Duke,  Anthony  N.  Brady,  Oliver  H.  Payne,  Thomas 
F.  Ryan,  P.  A.  B.  Widener,  and  William  C.  Whitney.'*  Inasmuch 
as  the  Consolidated  Tobacco  Company  controlled  the  American 
Tobacco  Company,  these  six  men  dominated  the  whole  Tobacco 
Combination. 

The  main  reason  for  the  formation  of  a  holding  company  seems 
to  have  been  to  effect  the  concentration  of  control  just  described. 
Another  purpose,  however,  was  to  obtain  additional  capital  in 
order  to  expand  the  business  of  the  Combination.  One  direction 
which  this  expansion  took  was  the  foreign  trade. 

Since  its  formation  (1890)  the  American  Tobacco  Company 
had  had  a  considerable  foreign  trade,  mainly  in  cigarettes.  Dur- 
ing the  nineties  it  extended  this  trade  considerably.  As  an  aid  in 
selHng  its  exported  cigarettes,  and  to  secure  the  advantages  of 
production  near  the  market,  it  acquired  several  companies  in 
foreign  countries,  including  Germany,  Japan,  Australia,  and 
Canada.    In  the  fall  of  190 1,  the  necessary  cash  being  supplied  by 

'  Report  on  the  Tobacco  Industr>',  part  I,  p.  120.     » Ibid.,  pp.  124-125. 
''Ibid.,  p.  121.  "Ibid.,  p.  119. 


THE  AMERICAN  TOBACCO  COMPANY  135 

the  organization  of  the  Consolidated  Tobacco  Company,  a  deci- 
sion was  made  to  compete  more  vigorously  for  the  English  trade. 
As  the  first  step  in  this  program,  the  American  Tobacco  Com- 
pany acquired  in  September,  1901,  the  firm  of  Ogden's  (Limited), 
one  of  the  leading  tobacco  manufacturing  concerns  in  the  United 
Kingdom.^  This  invasion  of  their  field  caused  great  alarm  among 
the  other  British  manufacturers  of  tobacco,  and  to  protect  them- 
selves against  the  powerful  American  company  thirteen  of  the 
leading  manufacturers  united  in  December,  1901,  to  form  the 
Imperial  Tobacco  Company.  The  British  combination  at  once 
inaugurated  a  campaign  to  drive  out  the  American  concern. 
Large  bonuses  were  offered  to  such  customers  as  would  agree  not 
to  handle  American  goods  for  a  period  of  years.  The  American 
Tobacco  Company,  through  the  Ogden's  concern,  retaliated  by 
promising  to  its  British  customers  all  of  its  net  profits  for  the 
following  four  years,  and  in  addition  £200,000.-  The  Imperial 
Tobacco  Company  then  threatened  to  meet  the  American  To- 
bacco Company  in  its  own  territory,  and  during  the  summer  of 
1902  was  reported  to  be  choosing  locations  for  its  American 
plants.  But  in  September,  1902,  before  this  threat  was  carried 
out,  an  agreement  was  entered  into  which  brought  the  struggle  to 
an  end. 

By  this  agreement  the  American  Tobacco  Company  and  its 
allied  concerns  transferred  all  their  business  in  Great  Britain  and 
Ireland  to  the  Imperial  Tobacco  Company.^  This  included,  of 
course,  the  firm  of  Ogden's.  The  Imperial  Tobacco  Company, 
for  its  part,  agreed  not  to  manufacture  or  sell  tobacco  in  the 
United  States,  except  through  the  American  Tobacco  Company, 
though  it  reserved  the  right  to  buy  tobacco  leaf  in  the  United 
States  for  its  business  in  Great  Britain.  The  American  Tobacco 
Company  and  the  Imperial  Tobacco  Company  then  united  in  the 
organization  of  a  new  corporation  to  handle  the  tobacco  trade  in 
the  countries  outside  of  the  United  States  (and  its  noncontiguous 

1  Report  on  the  Tobacco  Industry,  part  I,  p.  166. 
^  Ibid.,  p.  169. 

^  A  copy  of  the  agreement  is  in  the  Report  on  the  Tobacco  Industry, 
part  I,  pp.  431-447- 


136        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

territories)  and  Great  Britain.  The  American  Tobacco  Com- 
pany received  two-thirds  of  the  stock  of  the  new  company,  and 
the  Imperial  Tobacco  Company  one-third.  The  British-Ameri- 
can Tobacco  Company  (the  new  concern)  was  incorporated  in 
Great  Britain  in  1902,  and  it  acquired  all  the  foreign  business  of 
the  American  and  Imperial  Companies.  It  was  provided  that 
the  British- American  Tobacco  Company  could  engage  in  the 
manufacture  of  tobacco  products  in  the  United  States  or  Great 
Britain,  but  solely  for  the  purpose  of  engaging  in  the  export 
trade.  After  this  agreement  was  entered  into  the  British- Ameri- 
can Tobacco  Company  rapidly  developed  its  business  in  foreign 
countries,  with  the  result  that  it  established  itself  in  almost 
every  country  where  the  manufacture  of  tobacco  was  not  a 
government  monopoly. 

The  Tobacco  Combination  was  controlled  until  1904  by  the 
Consolidated  Tobacco  Company.  But  on  October  19,  1904,  the 
Consolidated  Tobacco  Company  and  its  two  subsidiary  concerns 
(the  American  and  the  Continental)  were  merged  into  a  single 
company, — the  American  Tobacco  Company.^  This  new  com- 
pany, until  the  dissolution  in  191 1,  remained  the  dominant  con- 
cern in  the  Combination. 

There  were  several  reasons  for  the  change  in  organization. 
In  the  first  place,  the  Northern  Securities  decision,  rendered  in 
1904,  raised  grave  doubts  as  to  the  legality  of  the  Consolidated 
Tobacco  Company,  which,  like  the  Northern  Securities  Com- 
pany, was  a  holding  company.  Secondly,  it  was  hoped  to  im- 
prove the  market  for  the  bonds  of  the  Consolidated  Tobacco 
Company.  These  bonds  had  always  sold  at  a  low  figure.  By 
exchanging  a  part  of  these  bonds  for  6  per  cent  preferred  stock  in 
a  new  company  it  was  believed  that  the  market  for  the  remaining 
bonds  would  be  improved.  Thirdly,  the  insiders  desired  to  con- 
centrate the  control  of  the  entire  business  more  fully  in  the  hands 
of  the  common  stockholders.-  Prior  to  the  merger  of  1904,  the 
preferred  stocks  of  the  American  and  Continental  Companies, 
which  were  largely  held  by  the  outsiders,  had  voting  power, 
although  not  enough  to  outvote  the  common  stock  in  these  com- 

1  Report  on  the  Tobacco  Industry,  part  I,  p.  128.  '  Ibid.,  p.  129. 


THE  AMERICAN  TOBACCO  COMPANY  137 

panics  held  by  the  ConsoHdated  Tobacco  Company.  But  by 
the  exchange  of  this  preferred  stock  for  bonds  in  the  reorganized 
American  Tobacco  Company,  and  by  the  issuance  by  the  latter 
company  of  new  6  per  cent  nonvoting  preferred  stock,  given  in 
exchange  for  part  of  the  4  per  cent  bonds  of  the  Consolidated 
Tobacco  Company,  the  power  of  the  insiders  in  the  Combina- 
tion was  made  even  more  secure  than  it  had  been. 

After  the  merger  in  1904  the  same  methods  that  had  been 
used  from  the  beginning  continued  to  be  employed.  This,  the 
Supreme  Court  held,  was  indisputably  established  by  the  record. 
Competitors  were  acquired;  restrictive  covenants  against  en- 
gaging in  the  tobacco  business  were  taken  from  the  sellers;  and 
plants  were  purchased,  not  to  operate,  but  in  order  that  they 
might  be  dismantled.^ 

The  American  Tobacco  Company,  the  controlling  factor  in  the 
whole  Tobacco  Combination,  was  controlled  by  a  very  few  indi- 
viduals. At  the  end  of  1906  this  company  had  a  total  capitaliza- 
tion of  $235,191,950,  but  of  this  amount  only  the  common  stock, 
representing  about  one-sixth  of  the  total,  had  any  voting  power 
for  the  election  of  directors,  or  for  the  ordinary  affairs  of  manage- 
ment. The  great  bulk  of  the  common  stock  was  owned  by  the 
directors  and  their  associates.  The  twenty-eight  directors  and 
four  other  stockholders  together  owned  77  per  cent  of  the  com- 
mon stock;  indeed,  the  ten  largest  stockholders,  six  of  whom  were 
directors,  together  owned  63  per  cent  of  all  the  common  stock. ^ 
And  since  the  American  Tobacco  Company  (the  1904  corpora- 
tion) held  a  large  part  of  the  stock  of  the  trusts  or  combinations 
in  the  other  branches  of  the  tobacco  business — the  American 
Snuff  Company,  the  American  Cigar  Company,  the  British- 
American  Tobacco  Company,  and  a  vast  number  of  other  con- 
cerns— the  control  of  the  whole  Tobacco  Combination  rested  in 
the  hands  of  a  very  small  number  of  persons.^ 

The  historical  development  of  the  various  tobacco  combina- 

1  221  U.  S.  174-175. 

"^  Report  on  the  Tobacco  Industry,  part  I,  pp.  202-203. 
'  For  a  list  of  the  subsidiary  companies  in  the  Tobacco  Combination  in 
1906,  see  Report  on  the  Tobacco  Industry,  part  I,  pp.  212-218. 


138        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

tions  and  trusts  has  been  briefly  outlined.  It  has  been  seen  that 
these  combinations  upon  their  estabHshment  generally  possessed 
a  high  degree  of  control  over  the  industry.  To  what  extent  was 
this  control  maintained?  From  lack  of  more  recent  reliable  data 
we  must  make  use,  for  the  most  part,  of  the  figures  contained  in 
the  reports  of  the  Commissioner  of  Corporations  on  the  Tobacco 
Industry. 

The  position  of  the  tobacco  trust  in  the  cigarette  and  little 
cigar  business  combined  for  the  years  1 891-1906  is  shown  in  the 
following  table  (the  records  of  the  Bureau  of  Internal  Revenue 
do  not  show  the  production  of  these  products  separately  until 
1898): 

Total  Output  of  Cigarettes  and  Little  Cigars,  and  Proportion 
Thereof  Made  by  the  Tobacco  Combination,  1891-1906  ' 


Output. 

Per  cent 

Output. 

Per  cent 

Year 

000,000 

made  by 

Year 

000,000 

made  by 

omitted 

Combination 

omitted 

Combination 

Number 

Number 

1891  . . 

3,137 

88.9 

1899  .  . 

4,367 

89.0 

1892  . . 

3,282 

87 

9 

1900  .  . 

4,255 

88.1 

1893  . . 

3,660 

85 

3 

1901  .  . 

4,505 

87.1 

1894  .  . 

3,620 

86 

5 

1902  .  . 

4,820 

82.8 

1895  .  . 

4,^37 

87 

3 

1903  . 

5,327 

82.1 

1896  .  . 

4,967 

83 

4 

1904  .  . 

5, 88 1 

86.6 

1897  .  . 

4,927 

80 

0 

1905  .  . 

6,309 

839 

1898  .  . 

4,842 

84 

6 

1906  .  . 

7,427 

82.3 

In  1891  the  trust  produced  88.9  per  cent  of  the  cigarettes  and 
little  cigars  made  in  this  country.  In  1892  and  1893  its  propor- 
tion declined,  reaching  85.3  per  cent  in  the  latter  year.  This  was 
in  spite  of  the  acquisition  in  1892  of  the  large  cigarette  business 
of  Hernsheim  Brothers.  By  1895,  largely  through  the  purchase 
of  three  of  the  most  important  little  cigar  concerns  in  the  coun- 
try, the  trust  had  increased  its  control  to  87.3  per  cent.  The 
next  year  the  Drummond  Tobacco  Company  and  the  Liggett 
and  Myers  Tobacco  Company,  plug  manufacturers  with  plants 


^  Report  on  the  Tobacco  Industry,  part  I,  p.  325. 


THE  AMERICAN  TOBACCO  COMPANY  139 

in  St.  Louis,  engaged  on  a  large  scale  in  the  manufacture  of 
cigarettes,  as  a  measure  of  retaliation  against  the  American 
Tobacco  Company,  which  was  then  conducting  its  destructive 
campaign  for  the  plug  business.  As  showing  the  importance  of 
these  concerns,  the  cigarette  output  at  St.  Louis  increased  from 
twenty  million  cigarettes  in  1895  to  three  hundred  and  eighteen 
million  in  1896.  In  1897  the  sales  of  the  American  Tobacco 
Company  actually  declined.  The  result  was  a  reduction  in  its 
output  from  87.3  per  cent  in  1895  to  80.0  per  cent  in  1897.  The 
competitors  of  the  cigarette  trust  had  thus  given  a  very  good 
account  of  themselves.  But  in  1898  the  Drummond  Tobacco 
Company  was  acquired  by  the  American  Tobacco  Company, 
and  in  1899  the  Liggett  and  Myers  concern  came  into  the  fold; 
and  as  a  result  the  percentage  of  the  American  Tobacco  Com- 
pany rose  from  80.0,  to  which  it  had  fallen  in  1897,  to  89.0  in  1899. 
From  then  on  until  1903  the  proportion  of  the  trust  declined 
steadily,  falling  to  82.1  per  cent  in  1903.  In  1904  the  percentage 
increased  to  86.6,  in  part  because  of  the  acquisition  of  competi- 
tors; but  by  1906  had  fallen  to  82.3.  Though  greatly  increas- 
ing its  output  since  1891,  the  trust  did  not  quite  hold  its  own, 
and  had  it  not  been  for  the  purchase  of  the  leading  competitors, 
would  undoubtedly  have  lost  very  heavily;  in  fact,  it  is  quite 
likely  that  it  would  have  found  itself  unable  to  maintain  its 
monopoHstic  position. 

Since  1898  the  figures  are  available  for  cigarettes  and  little 
cigars  separately.  The  important  data  with  respect  to  cigarettes 
are  shown  in  the  table  on  page  140. 

The  table  calls  for  little  comment.  The  acquisition  of  the 
Drummond,  and  the  Liggett  and  Myers  concerns  in  1898  and 
1899  added  considerably  to  the  trust's  proportion  of  the  cigarette 
business;  and  by  1899  it  was  producing  94.7  per  cent  of  the  total. 
From  then  until  1907  its  percentage  declined  every  year,  with 
the  exception  of  1904.  The  increase  in  1904  was  due  in  large 
measure  to  the  acquisition  in  the  preceding  year  of  the  Wells- 
Whitehead  Tobacco  Company.  The  steady  increase  in  the 
cigarette  business  of  the  independents  up  to  1907  can  be  ex- 
plained in  part  by  the  growing  preference  on  the  part  of  the 


I40        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 


Total  Output  of  Cigarettes,  and  Proportion  Thereof  Made  by  the 
Tobacco  Combination,  1898-1910  ^ 


Year 

Output.^ 
000,000  omitted 

Per  cent  made 
by  Combination 

1898 

1899 

1900 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

1910 

Number 
4,385 
3,744 
3,644 
3,730 
4,144 
4,735 
5,145 
5,505 
6,437 
7,077 
7,351 
8,500 

9,985 

88 

94 
92 
89 
84 
83 
87 
84 
82 
81 
81 

83 
86 

3 

7 
7 
9 
6 

9 

7 
7 
5 

7 
8 
6 

I 

public  for  Turkish  cigarettes.  These,  except  for  the  cheaper 
grades,  were  largely  made  by  hand,  and  this  naturally  helped  the 
smaller  concerns.  The  independents,  principally  Turks,  Greeks, 
and  Egyptians,  produced  about  half  of  all  the  Turkish  cigarettes 
made  in  this  country. '^  After  1907,  however,  the  independents 
lost  ground  relatively;  by  1910  the  trust  was  producing  86.1  per 
cent  of  the  total  output. 

The  figures  just  given  are  for  the  output  of  this  country.  The 
Tobacco  Combination,  however,  was  a  large  exporter  of  cigar- 
ettes—it was,  in  fact,  practically  the  only  exporter— and  its 
proportion  of  the  output  produced  for  domestic  consumption  was 
somewhat  less  than  its  proportion  of  the  total  output.  Thus, 
whereas  in  1908  it  had  produced  81.8  per  cent  of  the  country's 
output  of  cigarettes,  it  produced  only  76.7  per  cent  of  the  cigar- 
ettes entering  into  domestic  consumption."* 

After  1898  the  Tobacco  Combination  greatly  increased  its 

'  Report  on  the  Tobacco  Industry,  part  III,  p.  153. 

2  Includes  rjuantities  in  bonded  warehouses  for  export. 

3  Report  on  the  Tobacco  Industry,  part  I,  p.  334. 
*  Ibid.,  p.  329;  and  part  II,  p.  43. 


THE  AMERICAN  TOBACCO  COMPANY 


141 


control  over  the  little  cigar  branch.  In  1898  it  had  produced  less 
than  half  of  the  little  cigars;  by  1910  it  produced  over  nine- 
tenths.  ^  This  strengthening  of  its  position  can  be  ascribed  to 
causes  similar  to  those  which  made  it  possible  for  it  to  maintain 
its  monopolistic  position  in  the  manufacture  of  cigarettes  from 
the  domestic  leaf.  Important  among  these  causes  was  the 
possibility  of  manufacturing  little  cigars  economically  by  the  use 
of  machinery,  and  the  control  by  the  American  Tobacco  Com- 
pany of  the  patented  machines.^ 

The  development  of  the  Combination's  control  over  the  plug 
tobacco  business  is  shown  by  the  table  below: 


Total  Output  of  Plug  and  Twist  Tobacco,  and  Proportion  Thereof 
Made  by  the  Tobacco  Combination,  1891-1910 ' 


Year 

Outputs 
000,000  omitted 

Per  cent 

made  by 

Combination 

Year 

Output. 
000,000  omitted 

Per  cent 

made  by 

Combination 

1891. 
1892. 
1893. 
1894. 
1895. 
1896. 
1897. 
1898. 
1899. 
1900. 

Pounds 
166 
171 

147 
160 
167 

153 
182 

165 
170 

175 

2.7 

3-5 

5-9 

5-6 

12.4 

20.1 

20.9 

23.0 

56.3 
62.0 

1901 . 
1902. 

1903- 
1904. 
1905. 
1906. 
1907. 
1908. 
1909. 
1910. 

Pounds 

173 
189 
186 
176 
172 
182 
177 

183 
192 
194 

67 
71 
76 
78 
80 
81 
80 
81 

83 
84 

7 
2 

9 

2 

7 
8 

5 
9 
3 
9 

The  total  production  of  plug  tobacco  has  not  increased  in 
proportion  to  the  increase  in  population,  but  the  Combination 
steadily  increased  its  proportion  of  the  business.  In  1891,  when 
the  American  Tobacco  Company  by  the  purchase  of  the  National 
Tobacco  Works  entered  the  plug  branch,  it  produced  but  2.7 


^  Report  on  the  Tobacco  Industry,  part  III,  p.  181. 

2  Ibid.,  part  I,  pp.  31,  345- 

'  Ibid,, part  III,  p.  49. 

*  Includes  quantities  in  bonded  warehouses  for  export. 


142       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

per  cent  of  the  total  output.  The  monopoly  of  the  cigarette 
trade  possessed  by  it  obviously  facilitated  the  expansion  of  its 
plug  business,  since  the  monopoly  profits  of  the  cigarette  branch 
could  be  used  to  finance  a  campaign  to  push  the  sale  of  its  plug 
tobacco.  This  competitive  campaign  caused  the  American 
Tobacco  Company  losses  exceeding  three  million  dollars  for 
the  years  1895  to  1898,^  but  enabled  it  to  increase  its  percent- 
age by  1898  to  23  per  cent  of  the  country's  output.  The 
American  Tobacco  Company  thus  became  the  most  powerful 
concern  in  the  trade.  Toward  the  close  of  1898  the  Continental 
Tobacco  Company  was  formed;  and  early  in  1899  this  company 
acquired  the  Liggett  and  Myers  Tobacco  Company,  and  the  R.  J. 
Reynolds  Tobacco  Company  (a  concern  with  a  very  large  busi- 
ness in  the  South).  As  a  result  the  Combination's  proportion 
was  increased  to  56.3  per  cent  in  1899,  and  to  62.0  per  cent  in 
1900.  In  almost  every  year  after  1900  the  Combination  in- 
creased its  production  and  its  proportion  of  the  total,  the  per- 
centage having  increased  by  1910  to  84.9.  In  almost  every  year, 
also,  the  independent  output  declined.  This  decline  in  the  out- 
put of  the  independent  concerns,  stated  the  Commissioner  of 
Corporations,  speaking  of  the  situation  up  to  1907,  "has  been 
almost  wholly  due  to  the  transfer  of  plants  from  the  independent 
ranks  to  those  of  the  Combination."^  A  great  many  of  the 
plants  thus  acquired  were  closed,  and  the  brands  in  many  cases 
were  discontinued. 

The  smoking  tobacco  branch  shows  the  same  general  situation. 
By  means  already  described,  the  Combination  by  1900  had 
efifected  control  of  three-fifths  of  the  smoking  tobacco  business. 
Slowly,  but  surely,  after  1900  it  increased  its  hold  on  the  indus- 
try, until  by  1910  it  was  producing  over  three-fourths  of  the  total 
output  of  smoking  tobacco.^  After  1900  the  independent  con- 
cerns, despite  the  purchase  of  several  of  their  number  by  the 
Combination,  materially  increased  their  output,  but  not  at  so 

^  Report  on  the  Tobacco  Industry,  part  I,  p.  367. 
2  Ibid.,  p.  34.     For  details  see  ibid.,  pp.  364-375. 

'Ibid.,  part  III,  p.  84.  Smoking  tobacco  includes  also  scrap  and  rut 
plug  tobacco. 


THE  AMERICAN  TOBACCO  COMPANY  143' 

rapid  a  rate  as  the  Combination, — which  was  developing  not 
only  by  internal  expansion,  but  also  through  outside  acquisitions. 

The  production  of  fine-cut  tobacco  is  much  less  than  that 
of  plug  and  smoking  tobacco;  and  it  has,  moreover,  decreased 
since  1890.  The  Combination  increased  its  control  of  fine-cut 
tobacco  from  50.5  per  cent  in  1900  to  81.7  per  cent  in  1905;  and 
this  percentage  was  substantially  maintained  thereafter,  the  pre- 
cise figure  for  1910  being  79.7  per  cent.^ 

As  already  described,  with  the  organization  of  the  American 
Snuff  Company  in  1900  the  Tobacco  Combination  secured 
control  of  four-fifths  of  the  country's  output  of  snuff.  This 
control  was  gradually  increased,  and  by  19 10  the  trust  produced 
96.5  per  cent  of  the  total  output.^  The  growth  since  1901  can 
be  explained  in  part  by  the  absorption  of  competing  concerns, 
but  it  was  due,  in  the  main,  to  the  increased  output  of  the  con- 
cerns already  owned.  The  Tobacco  Combination's  position  in 
the  snuff  business  was  more  monopolistic  in  1910  than  in  any 
other  branch  of  the  tobacco  industry. 

In  striking  contrast,  as  shown  by  the  table  on  page  144, 
stands  the  cigar  industry.  The  Tobacco  Combination  for  some 
time  previous  to  1910  produced  only  about  one-seventh  of  the 
cigars  made  in  this  country;  and  was  not  able  to  increase  this 
percentage.  It  had  thousands  of  competitors,  many  of  whom 
operated  on  an  exceedingly  small  scale.  Unless  satisfactory 
machinery  can  be  invented,  and  the  exclusive  patent  rights  on 
its  manufacture  can  be  obtained  by  the  Combination,  this  one 
field  of  the  tobacco  industry,  in  all  likelihood,  will  remain  open 
to  independent  endeavor. 

That  the  tobacco  industry  in  all  the  leading  branches  except 
cigars  was  controlled  up  to  the  dissolution  decree  (191 1)  by  a 
trust  or  a  union  of  trusts  has  been  shown.  By  what  means  was  it 
able  to  maintain  this  control? 

One  thing  is  clear.  The  Combination  was  not  able  to  maintain 
its  position  by  virtue  of  the  ownership  or  control  of  the  leaf 
tobacco, — the  most  important  raw  material.  The  American 
Tobacco  Company  controlled,  it  is  true,  a  few  companies  pro- 

^  Report  on  the  Tobacco  Industry,  part  III,  p.  127.  ^  Ibid.,  p.  138. 


144       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 


Total  Output  of  Cigars,  and  Proportion  Thereof  Made  by  the 
Tobacco  Combination,  1898-1910  ^ 


Year 

Output. 
000,000  omitted 

Per  cent  made 
by  Combination 

1898 

1899 

1900 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

1910 

Number 
4,458 
4,909 
5,565 
6,139 
6,231 
6,806 
6,640 
6,747 
7,147 
7,302 
6,488 
6,667 
6,810 

2 

4 

4 

10 

14 
16 

13 
13 
14 
14 
13 
13 
14 

2 
0 
8 
9 
3 
4 
9 
3 
7 
5 
0 
I 
4 

ducing  leaf  tobacco  in  Cuba  and  Porto  Rico,  but  it  did  not — nor 
did  any  other  important  manufacturer — engage  in  the  raising  of 
tobacco  in  the  United  States.^  In  this  respect,  therefore,  it 
presents  a  striking  contrast  to  the  steel  and  oil  trusts.  The 
Tobacco  Combination  endeavored,  to  be  sure,  to  restrain  the 
operation  of  the  law  of  supply  and  demand  in  the  purchase  of 
its  leaf  tobacco,  but  it  did  not  obtain  nor  endeavor  to  obtain 
permanent  control  over  the  production  of  the  raw  material. 
Clearly  there  would  be  little  advantage  to  it  in  making  the 
attempt,  since  the  large  amount  of  land  that  might  be  devoted 
to  tobacco  culture  would  render  the  failure  of  the  attempt 
inevitable. 

The  Tobacco  Combination,  however,  did  have  a  well-nigh 
complete  monopoly  of  the  manufacture  of  licorice  paste  in  this 
country.  Licorice,  next  to  leaf  tobacco,  is  the  most  important 
raw  material  used  in  the  manufacture  of  tobacco  products.  It  is 
used  mainly  in  the  manufacture  of  plug  tobacco,  but  also  in  the 
manufacture  of  smoking  tobacco  and  snuff.     The  American 

'  Report  on  the  Tobacco  Industry,  part  III,  p.  192. 
2  Ibid.,  part  I,  p.  48- 


THE  AMERICAN  TOBACCO  COMPANY  145 

Tobacco  Company,  through  the  MacAndrews  and  Forbes 
Company,  produced  in  1907,  95  per  cent  of  the  total  output  of 
licorice  paste.  ^  The  control  of  the  licorice  branch  served  to 
strengthen  greatly  the  Combination's  control  of  the  tobacco 
industry. 

Other  important  subsidiaries  of  the  American  Tobacco  Com- 
pany were  the  Conley  Foil  Company  and  the  Johnston  Tin  Foil 
and  Metal  Company,  manufacturers  of  tin  foil;  the  Golden  Belt 
Manufacturing  Company,  producer  of  cotton  bags  to  be  used  in 
packing  tobacco;  the  Mengel  Box  Company,  manufacturer  of 
wooden  boxes;  several  companies  making  machinery  to  be  used 
in  tobacco  manufacture,  or  holding  patents  on  machines;  the 
Kentucky  Tobacco  Product  Company,  which  made  nicotine 
extracts  out  of  tobacco  stems,  the  main  by-product  of  tobacco 
manufacture;  and  the  Manhattan  Briar  Pipe  Company,  manu- 
facturer of  pipes  and  smokers'  supplies. - 

Neither  was  the  Combination's  monopolistic  position  the 
result  of  railway  rebates, — a  factor  of  so  great  importance  in 
building  up  the  Standard  Oil  Company.  Because  of  the  fact  that 
tobacco  products  have  generally  a  large  value  in  small  bulk,  the 
item  of  transportation  cuts  little  figure  in  the  relative  position 
of  competing  tobacco  concerns. 

It  would  undoubtedly  be  a  mistake,  furthermore,  to  attribute 
the  trust  to  the  tariff.  The  duties  on  manufactured  tobacco 
products,  it  is  true,  have  been  relatively  high,  and  this  has 
restrained  foreign  competition.  But  the  imports  would  hardly 
be  considerable  in  any  event.  The  United  States  is  the  largest 
producer  of  leaf  tobacco  in  the  world;  and  though  it  imports 
some  high  grade  leaf  tobacco,  chiefly  for  cigars,  it  exports  huge 
quantities.  The  abundant  raw  material  thus  gives  to  this 
country  a  great  advantage.  The  tobacco  trust,  in  fact,  is  a  large 
exporter  of  cigarettes;  in  1906  about  one-third  of  the  total  out- 
put of  cigarettes  was  exported.^    The  trust's  ability  to  hold  the 

1  Brief  for  the  United  States  in  United  States  v.  American  Tobacco  Com- 
pany (nos.  118,  119),  p.  13. 

2  Report  on  the  Tobacco  Industry,  part  I,  p.  24. 

3  Ibid.,  p.  57. 


146        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

foreign  markets  indicates  that  it  would  be  able  successfully  to 
meet  foreign  competition  here.  The  export,  as  well  as  the  im- 
port, of  other  tobacco  products,  however,  is  insignificant.^ 

When  we  come  to  consider  the  part  played  by  the  economies 
of  the  trust  form  of  organization,  we  are  on  uncertain  ground. 
That  the  plants  of  the  Combination,  generally  speaking,  were 
very  much  larger  than  those  of  the  independents  is  certain.  This 
was  true  of  every  branch  of  the  tobacco  industry.  We  may  take, 
first,  the  cigarette  branch.  In  1906  the  tobacco  trust  manufac- 
tured 5,309,000,000  cigarettes,  or  82.5  per  cent  of  the  country's 
output.  Of  this  amount,  4,240,000,000,  or  four-fifths  of  its 
output,was  produced  in  three  plants,  located  at  New  York  City, 
Richmond,  Virginia,  and  Durham,  North  Carolina."  One  plant 
alone^the  factory  of  the  British-American  Tobacco  Company 
at  Durham — made  1,921^00,000  cigarettes,  which  was  over  one- 
third  of  the  trust's  output,  and  ahnost  30  per  cent  of  the  output 
of  the  whole  country. 

This  concentration  of  output  was  not  confined  to  the  factories 
of  the  trust.  In  the  same  year  (1906)  there  were  528  independent 
plants  (the  large  number  was  due  to  the  fact  that  Turkish  cigar- 
ettes are  often  made  by  hand).  Yet  six  of  these  plants  together 
produced  over  three-fifths  (61.9  per  cent)  of  the  total  independ- 
ent output,  or  more,  therefore,  than  all  the  remaining  522  com- 
bined.^ Twelve  more  yielded  24.6  per  cent  of  the  total  independ- 
ent output.  This  means  that  18  of  the  528  plants  turned  out 
86.5  per  cent  of  the  total  output  of  the  independents.  Yet  in 
spite  of  this  concentration  the  independent  plants  were  much 
smaller  than  the  trust's  plants.  Two  of  the  trust  plants  produced 
more,  and  one  produced  almost  as  much,  as  all  of  the  inde- 
pendents put  together.  Whatever  advantage  might  be  derived 
from  size  belonged,  therefore,  to  the  trust.  But,  of  course,  the 
vital  question  is  not,  could  the  trust  produce  more  cheaply 
than  its  competitors— that  it  could  do  so  is  hardly  to  be  ques- 
tioned—but could  these  big  plants  of  the  trust  produce  more 

1  Report  on  the  Tobacco  Industry,  part  I,  p.  57. 

2  Ibid.,  p.  340- 
» Ibid. 


THE  AMERICAN  TOBACCO  COMPANY  147 

cheaply  by  virtue  of  the  fact  that  they  were  united  under  one 
control.  In  other  words,  was  the  low  cost  of  producing  cigar- 
ettes by  the  trust  due  to  the  size  of  its  plants  or  was  it  due  to  the 
union  of  these  plants? 

On  this  point  it  is  difficult  to  return  a  definite  answer.  We 
may  refer,  however,  to  the  results  of  the  investigation  of  the 
Bureau  of  Corporations  into  the  comparative  costs  of  the  To- 
bacco Combination  and  of  its  successor  companies  after  the 
enforcement  of  the  dissolution  decree.^  From  this  investigation 
it  appears  that  the  factory  costs  of  producing  cigarettes  for  the 
trust  were  $1.74  per  thousand  in  1909,  and  $1.70  per  thousand 
in  19 10;  while  the  factory  costs  for  the  companies  that  succeeded 
the  trust  were  $1.66  per  thousand  in  both  1912  and  1913."  The 
slight  reduction  in  costs  effected  by  the  companies  when  sepa- 
rated from  each  other  was  due  largely  to  lower  leaf  costs  in  191 2 
aud  1913.  If  we  deduct  leaf  costs,  the  factory  costs  were  practi- 
cally the  same  in  each  one  of  these  years :  54  cents  per  thousand  in 
1909,  55  cents  in  1910,  54  cents  in  1912,  and  52  cents  in  1913.^ 
This  shows,  to  quote  the  Bureau,  "  that  so  far  as  manufacturing 
cost  is  concerned  the  question  of  relative  economy  relates  pri- 
marily to  the  size  of  the  factory  units  and  not  to  the  merger  of 
many  factories  and  companies  into  a  huge  consolidation."  "*  Or 
again:  "It  is  evident  .  .  .  that  the  decisive  factor  in  factory 
costs  other  than  leaf  has  been  volume  of  output  of  a  particular 
brand  at  a  single  factory  and  that  the  status  of  the  organization 
— that  is,  whether  the  factories  were  in  a  general  consolidation  or 
not — is  a  subordinate  factor."  °  This  conclusion  of  the  Bureau, 
it  should  be  said,  did  not  relate  to  the  cigarette  branch  alone;  it 
was  meant  to  apply  as  well  to  the  tobacco  business  as  a  whole. 

The  plug  plants  of  the  trust  were  also  distinctly  larger  than 
those  of  the  independent  concerns.  In  1906  the  trust  had  8  plug 
plants  with  an  output  of  5,000,000  pounds  or  more  each.^  These 
plants  turned  out  91.4  per  cent  of  its  total  production  of  plug. 
Yet  two  of  these  eight  plants  produced  59.4  per  cent  of  the 

1  On  the  dissolution  proceedings,  see  ch.  18.  *  Ibid.,  p.  15. 

2  Report  on  the  Tobacco  Industry,  part  III,  p.  324.  ^  Ibid.,   p.  16. 
^  Ibid.,  p.  326.                                                            *  Ibid.,  part  I,  p.  376. 


14S        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

trust's  output,  and  48.7  per  cent  of  the  country's  output.  The 
independents,  on  the  other  hand,  had  no  plants  as  large  as  any 
of  these  eight;  the  larger  independents  had  all  been  acquired 
by  the  trust.  Forty-two  and  a  half  per  cent  of  the  independent 
production  was  produced  in  the  seven  plants  having  an  out- 
put of  1,000,000  pounds  or  more,  and  50.8  per  cent  in  the 
forty-four  plants  producing  between  100,000  pounds  and 
1,000,000  pounds.  The  balance  (6.7  per  cent)  was  produced  in 
the  remaining  plants,  129  in  number. 

The  aforementioned  investigation  of  the  Bureau  of  Corpora- 
tions shows  for  the  plug  business  that  the  factory  costs  of  the 
companies  that  succeeded  the  trust  upon  its  dissolution  were 
less  than  the  costs  of  the  trust  itself.  These  factory  costs  were  as 
follows:  20.0  cents  per  pound  in  1909;  19.5  cents  in  1910;  18. i 
cents  in  191 2;  and  18.5  cents  in  1913.^  But  the  leaf  costs  of  the 
successor  companies  were  distinctly  less  in  191 2  and  1913  than 
those  of  the  trust  in  1909  and  19 10;  and  this  explains  all  the 
decline  in  factory  costs.  In  fact,  if  we  deduct  leaf  costs,  the 
factory  costs  of  the  successor  companies  were  actually  greater, 
yet  by  a  very  small  fraction.  It  seems  to  be  clear,  therefore, 
that  so  far  as  factory  costs  were  concerned,  it  was  not  the  trust 
itself  that  was  principally  responsible  for  the  low  production 
costs;  it  was  rather  the  tremendous  size  of  its  plants. 

What  has  been  said  of  the  cigarette  and  plug  branches  applies 
substantially  to  the  others,^  though  especial  mention  may  be 
made  of  the  cigar  branch. 

With  respect  to  cigars,  the  Tobacco  Combination  in  1906  had 
two  plants  making  over  50,000,000  cigars,  the  average  output  of 
these  two  plants  for  that  year  being  about  190,000,000.'^  There 
were  no  independent  plants  producing  as  many  as  50,000,000 
cigars;  hence  the  Combination  had  easily  the  two  largest  plants. 
Over  one-third  of  its  output,  in  fact,  was  produced  in  these  two 

^  Report  on  the  Tobacco  Industry,  part  III,  p.  224. 

^  On  smoking  tobacco  see  Report  on  the  Tobacco  Industry',  part  I,  pp.  391- 
396,  part  II,  pp.  251-256;  on  snufF  see  part  I,  pp.  402-406,  part  II,  pp.  307- 
312. 

'  Report  on  the  Tobacco  Industry,  part  I,  p.  425. 


THE  AMERICAN  TOBACCO  COMPANY  149 

plants.  But  these  plants  produced  largely  cheroots  and  small 
cigars,  rather  than  the  ordinary  domestic  cigars.  When  we  turn 
to  the  remaining  cigar  plants  of  the  Combination — 44  in  num- 
ber— we  find  that  they  were  of  widely  varying  sizes;  and  that 
many  of  them  were  much  smaller  than  a  number  of  the  independ- 
ent plants.  It  is  true  that  the  average  output  of  the  Combina- 
tion's cigar  plants  exceeded  by  many  times  the  average  output  of 
the  independent  factories,  but  in  considerable  measure  this  was 
due  to  the  existence  of  some  25,000  cigar  factories  turning  out  a 
very  small  output.  Except  for  its  two  largest  factories,  the  Com- 
bination had  no  great  advantage  with  respect  to  size  over  its 
larger  competitors.  Were  size  as  important  as  for  the  other 
branches,  the  Combination  would  doubtless  have  acquired  its 
leading  competitors,  and  thus  have  strengthened  its  position  in 
this  respect.  But  size  was  not  vital  in  this  branch,  and  for  this 
reason  apparently  the  Combination  was  not  able  to  establish 
monopoly  control.  The  mere  possession  of  80  to  90  per  cent  of 
the  cigar  manufacture  would  not  enable  it  to  fix  monopoly  prices 
for  any  length  of  time;  the  increase  of  independent  production 
would  be  certain,  and  with  it  monopoly  control  would  be  lost. 

The  report  of  the  Bureau  on  costs  does  not  take  up  the  cigar 
branch,  and  for  this  reason  a  comparison  can  not  be  made  of  the 
costs  of  the  cigar  plants  of  the  Combination  before  and  after  the 
dissolution. 

The  foregoing  discussion  indicates  that  the  size  of  the  plant  is 
the  determining  factor  in  the  cost  of  production,  and  that  the 
dissolution  proceedings,  since  they  left  the  big  plants  intact,  did 
not  affect  materially  the  factory  costs.  But  the  situation  is 
otherwise  as  to  selling  costs.  The  subdivision  of  the  business  pro- 
vided for  in  the  dissolution  decree  led  to  a  duplication  of  selling 
organization  and  an  increased  overhead  expense;  and  the  result 
was  a  general  increase  in  selling  costs.  Thus,  the  selling  costs  of 
the  trust  in  all  branches  except  cigars  amounted  in  19 10  to 
$7,191,676,  while  in  1913  the  selling  costs  of  the  companies  that 
succeeded  to  its  business  amounted  in  the  same  branches  to 
$9,818,746,  an  increase  of  over  two  and  a  half  million  dollars.^ 
1  Report  on  the  Tobacco  Industry,  part  III,  p.  17. 


I50       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

In  every  branch,  except  flat  plug  and  Turkish  cigarettes,  the 
selling  costs  showed  an  increase.  Based  on  the  rates  per  thou- 
sand or  per  pound,  the  selling  costs  of  the  successor  companies  in 
19 13  in  the  cigarette  branch  were  55  per  cent  greater  than  for  the 
trust  in  1910;  91  per  cent  greater  in  the  little  cigar  branch;  11  per 
cent  greater  in  navy  plug;  39  per  cent  greater  in  plug-cut  smok- 
ing; 40  per  cent  greater  in  granulated  smoking;  44  per  cent 
greater  in  fine-cut  chewing;  and  46  per  cent  greater  in  snuff. 
The  selling  costs  of  the  successor  companies  for  flat  plug  and 
Turkish  cigarettes,  on  the  other  hand,  were  only  76  and  83  per 
cent,  respectively,  of  the  costs  of  the  trust  in  these  branches. 

The  advertising  expenditures  of  the  successor  companies  also 
greatly  increased  as  compared  with  the  expenses  of  the  trust. 
The  advertising  expenses  of  the  trust  in  1910  in  all  branches 
except  cigars  were  $10,895,132,  while  those  of  the  successor 
companies  in  1913  amounted  to  $23,623,564,  or  more  than 
double.^ 

The  trust  may  Hkewise  have  effected  some  economies  in  the 
purchase  of  its  supplies.  While  the  American  Tobacco  Com- 
pany manufactured  many  of  the  articles  that  it  needed  in  its 
business,  including  packages,  boxes,  etc.,  it  had  occasion  to  buy 
large  supplies,  such  as  sugar,  rum,  flavoring  extracts,  stationery, 
machinery,  tools,  and  furniture.  All  of  its  buying,  as  well  as 
that  of  its  affiliated  companies,  such  as  the  American  Snuff  Com- 
pany and  the  American  Cigar  Company,  was  done  for  it  by  one 
concern, — the  Amsterdam  Supply  Company.^  By  buying 
through  one  company  with  its  experienced  purchasing  agents, 
the  trust  was  possibly  able  to  get  some  of  its  supplies  on  more 
advantageous  terms. 

The  trust  also  found  the  control  of  patented  machinery  a 
source  of  great  strength.  The  concentration  of  the  manufac- 
ture of  tobacco  in  large  plants  and  the  specialization  of  these 
plants,  to  a  large  degree,  on  particular  brands,  permitted  a  wider 
utilization  of  machine  methods  than  was  possible  for  smaller 
concerns.     The   trust   substituted   machinery   for   hand   labor 

'  Report  on  the  Tobacco  Industry,  part  III,  p.  18. 
2  Ibid.,  part  I,  p.  265. 


THE  AMERICAN  TOBACCO  COMPANY  151 

whenever  practicable,  and  it  achieved  its  greatest  success  in  those 
lines  in  which  this  was  done.  In  the  cigarette  and  little  cigar 
branches,  where  practically  all  the  processes  were  performed  by 
machinery,  the  trust,  through  its  control  of  the  patented  ma- 
chines, was  able  to  maintain  a  monopoly  position  more  easily 
than  in  any  other  branch  of  the  tobacco  industry  except  snuff. 
In  the  cigar  branch,  where  machinery  is  least  used,  and  where 
patents  therefore  give  no  advantage,  the  trust  has  been  weakest. 

The  trust,  as  shown  earlier,  also  made  frequent  use  of  the  prac- 
tice of  local  price  discrimination, — the  weapon  so  effectively 
employed  by  the  Standard  Oil  Company.  In  the  localities  where 
independents  sought  a  foothold,  the  trust  frequently  sold  its  so- 
called  "fighting  brands"  at  a  loss;  and  in  this  way  checked  the 
growth  of  the  independent  concerns,  whose  field  of  competition 
was  generally  local.  This  proved  especially  effective,  because  the 
campaign  of  competition  could  be  limited  to  the  comparatively 
few  fighting  brands  held  by  the  trust,  the  prices  of  its  popular 
brands  being  generally  maintained  at  the  former  level.  The 
practice  of  local  price  cutting  touched  as  a  rule,  therefore,  only 
the  fringes  of  the  trust's  vast  business,  but  commonly  affected 
the  total  business  of  the  independents,  and  this  made  it  more 
difficult  for  them  to  bear  the  losses  of  such  a  campaign. 

The  policy  of  local  price  cutting  was  facilitated  through  the 
secret  ownership  of  a  number  of  tobacco  companies.  Many  deal- 
ers and  consumers  had  long  been  opposed  to  trusts  in  general 
and  to  the  tobacco  trust  in  particular.  To  take  advantage  of  this 
attitude  independent  manufacturers  frequently  advertised  their 
goods  as  "  not  made  by  a  trust."  The  refusal  of  the  trust  to  deal 
with  labor  organizations  had  engendered  much  hostihty  among 
the  trade  unionists  also,  and  many  of  them  refused  to  buy  any 
but  union  made  goods.  Manufacturers  catering  to  this  senti- 
ment were  able  to  develop  quite  a  trade.  In  order  to  meet  this 
situation,  the  trust,  especially  during  1903  and  1904,  secretly  se- 
cured a  controlling  interest  in  a  nimiber  of  concerns  catering  to 
the  anti-trust  and  pro-union  trade.  These  concerns,  after  be- 
ing acquired  by  the  trust,  continued  to  operate  under  their 
former  management,  and  pretended  to  be  independent  and  op- 


152        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

posed  to  the  trust.  ^  Those  which  had  friendly  relations  with  un- 
ion labor  continued  to  maintain  such  relations,  though  the  atti- 
tude of  the  trust  itself  was  one  of  bitter  hostility  to  trade  union- 
ism. These  secretly  controlled  concerns  were,  until  the  facts 
became  known,  a  highly  effective  engine  of  warfare  against  the 
real  independents.^ 

The  American  Tobacco  Company  likewise  endeavored  to  con- 
trol the  jobbing  trade.  In  the  cigarette  business,  for  example,  a 
factor's  agreement,  or  a  consignment  agreement  as  it  was  called, 
was  put  in  operation  in  the  latter  part  of  1895.^  According  to 
this  agreement  the  jobber  to  whom  cigarettes  were  consigned 
agreed  to  sell  only  to  the  retail  trade,  and  to  sell  only  at  the  price 
fixed  by  the  American  Tobacco  Company.  If  the  jobber  did  not 
discriminate  against  the  American  Tobacco  Company's  cigar- 
ettes, and  fully  complied  with  all  the  provisions  of  the  agreement, 
he  was  to  be  given  a  commission  of  2^4.  per  cent  on  the  receipts  of 
his  sales  of  cigarettes.  If,  however,  the  jobber  handled  no  cigar- 
ettes except  those  of  the  American  Tobacco  Company  (and  com- 
plied in  every  respect  with  the  consignment  agreement),  he  was  to 
receive  an  additional  commission  of  ^yi  per  cent.  Mr.  Whelan, 
a  wholesale  dealer,  claimed  before  the  Lexow  Committee  (1S97) 
that  a  jobber  could  hardly  do  business  without  some  of  the  goods 
of  the  American  Tobacco  Company;  that  2>^  per  cent  allowed 
the  dealer  no  profit;  and  that  there  was,  therefore,  a  very  strong 
incentive  to  agree  to  handle  the  American  Tobacco  Company's 
goods  exclusively. '  This  device  for  holding  the  trade  led  to  ad- 
verse legislation,  and  in  1897  was  abandoned. 

The  ability  of  the  trust  to  require  preference  in  the  sale  of  its 
goods, — to  the  extent  that  it  possessed  such  ability, — lay  in  con- 
siderable measure  in  its  exclusive  ownership  of  a  great  majority 

'  Report  of  the  Tobacco  Industry,  part  I,  p.  224. 

2  For  excellent  illustrations  of  the  secret  machinations  of  the  trust,  see 
Transcript  of  Record  in  United  States  v.  American  Tobacco  Company 
(no.  660),  vol.  II,  pp.  524,  640;  and  Report  of  the  Senate  Committee  on 
Control  of  Corporations,  1913,  p.  347. 

'Lexow  Report,  p.  872.  A  copy  of  the  agreement  is  in  Lexow  Report, 
pp.  878-883. 

^  Ibid.,  pp.  991-992. 


THE  AMERICAN  TOBACCO  COMPANY  153 

of  the  popular  brands  of  tobacco  products.  Some  of  these  brands 
had  became  such  standard  articles  that  dealers  had  to  handle 
them,  or  lose  a  great  deal  of  business  even  in  other  Hnes.  In  fact, 
the  trust's  monopoly  power  was  to  a  large  extent  founded  on  its 
control  of  the  greater  number  of  the  brands  enjoying  a  high 
degree  of  popular  favor. 

The  tobacco  trust  also  undertook  the  retail  distribution  of  its 
products.  This  it  did  largely  through  the  acquisition  of  the 
United  Cigar  Stores  Company.  This  concern  had  been  incorpo- 
rated in  New  Jersey  on  May  16,  1901,  by  persons  having  no  con- 
nection with  the  trust,  to  sell  and  distribute  tobacco  products  at 
retail.^  The  company  proved  so  successful  that  the  American 
Tobacco  Company  acquired  a  controlling  interest  in  it  in  No- 
vember, 1 901;  and  thereafter  it  supplied  it  with  the  necessary 
funds  for  expansion.^  The  United  Cigar  Stores  Company 
bought  its  products  direct  from  the  American  Tobacco  Company 
and  the  American  Cigar  Company,  instead  of  through  jobbers, 
but  it  handled  the  goods  of  independents  also.  In  1907  the 
United  Company  had  392  stores,  but  subsequently  the  number 
was  much  increased. 

It  is  thus  clear  that  a  great  many  factors  contributed  to  the 
success  of  the  tobacco  trust  in  establishing  and  maintaining  its 
monopolistic  position.  The  great  size  of  its  plants,  the  control  of 
the  licorice  paste,  tariff  protection,  the  ownership  of  patents  on 
machinery  used  in  tobacco  manufacture,  the  use  of  local  price 
discrimination  and  bogus  independent  concerns,  numerous  de- 
vices to  control  the  wholesale  and  retail  distribution  of  its  prod- 
uct,— all  helped  it  in  the  competitive  struggle.  Yet  the  growth 
of  the  trust's  control  of  the  tobacco  industry,  according  to  the 
Commissioner  of  Corporations,  "has  been  primarily  due  to  con- 
tinual buying  up  of  independent  concerns."  ^  Frequent  in- 
stances of  such  purchases  have  already  been  given.    Their  infiu- 

^  Report  on  the  Tobacco  Industry,  part  I,  p.  88. 

^  Brief  for  the  United  States  in  United  States  v.  American  Tobacco  Com- 
pany (nos.  118,  119),  p.  12.  On  December  31,  1906,  the  American  Tobacco 
Company  held  $340,000  of  the  $450,000  common  stock  of  this  company,  and 
all  of  its  bonds  and  preferred  stock. 

*  Report  on  the  Tobacco  Industry,  part  I,  p.  38. 


154        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

ence  is  further  shown  by  a  comparison  of  the  number  of  factories, 
with  their  output,  owned  at  different  periods  by  the  trust  with 
the  number  owned  by  the  independents.  The  years  1897,  1900, 
and  1906  are  significant  years.  From  a  table  given  in  the  report 
of  the  Bureau  of  Corporations  it  appears  that  in  1897  the  trust 
owned  five  plants  producing  chewing  and  smoking  tobacco  and 
snuff  with  an  output  of  five  million  pounds  each,  while  the  in- 
dependent concerns  had  seven  plants  of  this  size.^  In  1900  the 
independents  had  only  one  such  plant,  all  of  the  remaining  six 
having  been  acquired  by  the  trust,  which  in  that  year  was  oper- 
ating ten  plants  producing  as  much  as  five  million  pounds  each. 
By  1906  the  seventh  independent  plant  had  been  acquired  by 
the  trust,  and  the  trust  had  increased  the  output  of  some  of  its 
smaller  plants,  so  that  it  had  twenty-one  factories  all  told  of  the 
size  mentioned.  There  were  only  two  independent  concerns  pro- 
ducing over  five  million  pounds  in  1906,  two  new  concerns  having 
arisen  with  an  output  of  this  amount.  To  quote  from  the  report 
of  the  Bureau,  '' despite  enormous  expenditures  for  advertising 
and  in  'schemes'  and  despite  frequent  price  cutting  by  means  of 
its  so-called  'fighting  brands'  and  its  bogus  independent  con- 
cerns, there  has  been,  in  several  branches  of  the  industry,  a  con- 
stant tendency  for  competitors  to  gain  business  more  rapidly  than 
the  Combination  and  thus  to  reduce  its  proportion  of  the  output. 
This  tendency  has  been  overcome  only  by  continued  buying  up  of 
competitive  concerns.  Many  weaker  concerns  have  been  vir- 
tually driven  out  of  business  or  forced  to  sell  out  to  the  Combi- 
nation, either  by  reason  of  the  direct  competition  of  the  latter,  or 
as  an  indirect  result  of  the  vigorous  competition  between  the 
Combination  and  larger  independent  concerns.  In  the  case  of 
the  larger  and  more  powerful  concerns  which  it  accjuired,  how- 
ever, the  Combination  has  usually  secured  control  only  by  pay- 
ing a  high  price.  The  immense  profits  of  the  Combination  have 
enabled  it  to  keep  up  this  policy."  " 

What  effect  has  the  trust  had  upon  the  prices  of  tobacco  prod- 
ucts? We  may  take  up  first  the  cigarette  branch.  The  Amer- 
ican Tobacco  Company  (the  cigarette  trust)  was  organized  in 

'  Report  CD  the  Tobacco  Industrj',  part  I,  p.  39.  ^  Ibid.,  p.  41. 


THE  AMERICAN  TOBACCO  COMPANY 


155 


1890.  In  what  way  the  estabHshment  of  this  trust  affected 
prices  can  not  be  said;  the  detailed  data  with  respect  to  the  years 
immediately  following  the  formation  of  the  company  are  not 
obtainable.  The  really  significant  figures,  therefore,  are  lacking. 
The  prices  from  1893  to  1910,  however,  are  available,  and  these 
are  shown  in  the  following  table.  The  prices  are  wholesale,  since 
the  trust  sold  largely  to  jobbers. 

Wholesale  Prices  of  Cigarettes  Received  by  the  Trust  on  its 
Domestic  Business,  1893-1910  ^ 


Number 

sold. 
000,000 
omitted 

Average  per  thousand 

Year 

Net  price 

Tax 

Net  price 
less  lax 

Cosf^ 

Profit 

1893 

1894 

189s 

1896 

1897 

1898 

1899 

1900 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

1910 

2,588 
2,601 
2,919 
3,094 
2,883 
2,564 
2,495 
2,241 
1,990 
2,040 
2,402 

2,433 
2,686 

3,211 
3,859 
4,376 
5,362 
6,930 

$3- 
3 
3 
2 
2 
3 
3 
3 
3 
3 
4 
4 
4 
4 
4 
4 
4 
4 

52 
49 
27 
96 
94 
27 
SI 
66 
61 
86 

05 
00 
09 
26 

24 
42 

49 
.66 

$0 

SO 
50 
50 
50 
67 

25 

50 
50 
27 

01 
01 
00 
00 
01 
02 
02 
02 

•  15 

$3 
2 

2 

2 
3 
3 
3 
3 
3 
3 
3 
3 

02 
99 

77 
46 
27 
02 
01 
16 
34 
85 
04 
00 
09 
25 

40 
47 

SI 

$1.74 
1.63 
1.56 
1 .40 
1.27 

•97 

.89 

1 .00 

I-3I 
2.04 
2.01 
2.04 
2.02 
2.19 
2.30 
2^35 
2.37 
251 

$1.28 
1.36 
1 .21 
1.06 
I  00 

1. 05 
1 .12 
1. 16 
1.03 

.81 
1.03 

.96 
1.07 

1 .06 
•92 

I  05 
1 .10 
1 .00 

The  net  price  less  tax  on  all  the  cigarette  business  of  the  trust, 
exclusive  of  exports  and  foreign  output,  averaged  S3. 02  per 
thousand  in  1893.  From  then  until  1899  it  steadily  declined, 
reaching  $2.01  in  1899.  This  proved  to  be  the  low  point.  There- 
after until  1910  the  price  increased  almost  continuously,  and  in 
that  year  reached  $3.51.    But  the  increase  in  prices  since  1893  or 

1  Report  on  the  Tobacco  Industry,  part  III,  p.  155. 

2  Includes  manufacturing,  selling,  advertising,  and  freight. 


156       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

even  since  1899  (the  low  point)  has  not  been  commensurate  with 
the  increase  in  the  cost  of  production;  and  the  profit  in  19 10  was 
less,  therefore,  than  in  either  1893  or  1899.  It  is  difficult  to  say 
just  what  significance  attaches  to  these  figures.  The  important 
thing,  clearly,  would  be  a  comparison  of  the  range  of  prices  for 
cigarettes  after  the  trust  was  established  in  1890  with  the  range 
prior  to  that  time.  Data  on  this  point  being  lacking,  a  compar- 
ison might  be  made  of  the  prices  charged  for  tobacco  before  and 
after  the  dissolution  of  191 1.  Yet  for  reasons  given  on  page  472 
such  a  comparison  would  not  lead  to  any  definite  conclusions. 

No  conclusions  of  especial  value  can  be  drawn  from  a  study 
of  the  prices  of  little  cigars.     Until  1898  cigarettes  and  Uttle 
cigars  were  grouped  together  in  reports  made  to  the  Bureau  of 
Internal  Revenue,  and  therefore  it  is  not  possible  to  say  what 
proportion  of  the  little  cigar  business  was  controlled  up  to  that 
time  by  the  trust.    In  1898  (when  the  statistics  were  first  sepa- 
rated) the  trust  produced  48.7  per  cent  of  the  httle  cigars,  and 
its  control  gradually  increased  until  in  1910  it  was  as  high  as 
91.4  per  cent.    The  net  price  less  tax,  as  the  table  on  page  182  of 
the  report  of  the  Commissioner  of  Corporations  on  Prices  shows, 
was  distinctly  less  in  1910  than  in  1895  (the  first  year  for  which 
these  statistics  are  available  ^),  and  was  no  higher  than  in  1898 
when   the   Combination   controlled  only  half  the  Uttle  cigar 
industry.    But  the  cost  meanwhile  had  declined  greatly.    The 
cost  in  1910  was  64  cents  less  per  thousand  than  in  189S,  and  the 
price  about  the  same  as  in  1898.    It  follows  that  the  profit  was 
very  much  larger, — in  fact,  it  was  more  than  double.    It  appears, 
therefore,  that  the  trust  was  able  to  maintain  prices;  that  it  pre- 
vented the  reduction  in  prices  which  under  competitive  conditions 
might  be  expected  to  follow  a  considerable  decline  in  the  cost  of 
production.    To  arrive  at  any  definite  conclusions,  however,  we 
should  know  what  prices  and  costs  would  have  been  had  there  never 
been  a  little  cigar  trust,  and  that  of  course  can  not  be  ascertained. 
The  statistics  for  plug  tobacco  are  perhaps  more  significant. 

1  The  American  Tobacco  Company  kept  the  statistics  for  its  Httle  cigar 
business  separately  as  early  as  1895.  Report  on  the  Tobacco  Industry, 
part  III,  p.  182. 


THE  AMERICAN  TOBACCO  COMPANY 


157 


One  reason  is  that  they  are  obtainable  since  1893,  or  several 
years  before  the  formation  of  the  plug  trust.  This  renders  it 
possible,  therefore,  to  make  a  comparison  which  could  not  be 
made  for  the  cigarette  and  Uttle  cigar  branches, — a  comparison 
of  the  prices  immediately  before  and  after  the  organization  of 
the  trust.  The  plug  trust  (the  Continental  Tobacco  Company) 
controlled  56.3  per  cent  of  the  business  in  1899,  and  gradually 
increased  this  control  to  81.8  per  cent  in  1906.  The  relation 
between  steadily  increasing  monopolistic  control  and  prices  can 
thus  also  be  pointed  out. 
The  essential  figures  are  shown  in  the  following  table: 


Wholesale  Prices  of  Plug  Tobacco  Received  by  the  Trust, 
1893-1910  ^ 


Year 


Pounds 

sold. 
00,000 
0  milled 


Average  per  pound 


Net  price 


Tax 


Net  price 
less  tax 


Cost  - 


Profit 


1893. 
1894. 
1895. 


1897. 
1898. 
1899. 
1900. 
1901 . 
1902. 
1903. 
1904. 
1905. 
1906. 
1907. 
1908. 
1909. 
1910. 


31 
37 
32 
85 
no 
118 
132 
132 
124 
132 
138 
137 
147 
156 
154 


Cents 

340 

35- 
5 
9 

18.2 

25 

33 
34 
36 
35 
35 
35 
36 
36 
36 
36 
35 
36 


Cents 
6.0 
6.0 
6.0 
6.0 
6.0 

8.5 

12.0 

12.0 

10.9 

7.8 

6.0 

6.0 

6.0 

6.0 

6.0 

6.0 

6.0 

6.9 


Cents 
28.0 
29.1 

15-5 
12.9 
12.2 
16.7 

21 .0 
22.8 
25.1 
27.7 
29.4 
29.9 
30.2 
30.0 
30.2 

30.3 
29.7 

29. 1 


Cents 
30.6 
27.9 
20.0 

173 
14.6 
19.6 
18.8 
19.0 
18.6 

193 
19.6 
22. 1 
22.4 
21 . 1 
21.8 
22.3 
24.6 
24.4 


Cents 
3  2.6 

I . 
'4. 
'4. 


1  Report  on  the  Tobacco  Industry,  part  III,  p.  51. 

2  Includes  manufacturing,  selling,  advertising,  and  freight. 
'  Loss. 


158        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

In  1894,  when  there  was  no  important  concentration  of  the 
plug  business  in  the  hands  of  any  one  concern,  the  net  price  less 
tax  averaged  29.1  cents  per  pound.  The  inauguration  by  the 
American  Tobacco  Company  of  its  campaign  for  the  plug  busi- 
ness led  to  severe  cuts  in  prices.  The  existence  and  severity  of 
this  competition  is  shown  by  the  figures  for  1895  to  1898.  The 
average  price  per  pound  fell  from  29.1  cents  in  1894  to  15.5  cents 
in  1895,  to  12.9  cents  in  1896,  and  to  12.2  cents  in  1897.  In  the 
spring  of  1898  an  agreement  looking  toward  consolidation  was 
reached,  and  largely  as  a  result  the  average  price  for  1898  rose 
to  16.7  cents  per  pound, — quite  a  bit  higher  than  in  1897.  In 
1899,  the  year  of  the  acquisition  of  the  Liggett  and  Myers  con- 
cern, the  price  rose  to  21.0  cents,  and  in  1900  to  22.8  cents.  As 
the  trust  increased  its  control  year  by  year  the  price  rose,  and 
with  it  the  profit.  By  1901  the  price  had  advanced  to  25.1  cents, 
or  more  than  double  the  price  of  1897;  and  the  profit  was  6.5 
cents  per  pound  as  compared  with  a  loss  of  2.4  cents  in  1897.  By 
1908  the  high-water  mark  in  prices  was  reached  at  30.3  cents, 
the  profit  in  that  year  being  8.0  cents  per  pound.  The  Contin- 
ental Tobacco  Company  at  this  time  controlled  81.9  per  cent 
of  the  business.  The  year  1908  was  not  the  year  of  maximum 
profit,  however,  because  the  cost  was  higher  than  in  1903,  when 
a  profit  of  9.8  cents  per  pound  was  attained. 

The  power  and  influence  of  the  trust  is  indicated,  though 
not  proven,  by  the  course  of  prices  during  the  years  1901  to  1903. 
The  internal  revenue  tax  on  plug  tobacco  had  been  12.0  cents 
per  pound  in  1900.  In  1901  it  was  reduced  to  10.9  cents,  in  1902 
to  7.8  cents,  and  in  1903  to  6.0  cents.  In  spite  of  these  marked 
tax  reductions,  the  net  price  (including  tax)  rose  from  34.8  cents 
in  1900  to  36.0  cents  in  1901,  and  by  1903  had  declined  to  only 
35.4  cents.  In  other  words,  during  a  period  when  the  tax  was 
reduced  by  6  cents,  presumably  in  the  interests  of  the  consumer, 
the  price  actually  increased  six-tenths  of  one  cent.  The  cost  of 
production  during  these  years  increased  by  exactly  the  same 
amount  as  the  price.  It  is  evident,  therefore,  that  the  consumer 
got  no  benefit  from  the  reduction  in  the  tax;  and  that  he  was 
forced  to  pay  six- tenths  of  a  cent  more  to  compensate  the  trust 


THE  AMERICAN  TOBACCO  COMPANY  159 

for  the  increase  in  costs, — a.n  increase  which  exactly  equalled  the 
rise  in  price.  In  view  of  these  facts,  the  profits  of  the  trust  must 
have  greatly  increased.  The  profit  per  pound  had  been  3.8  cents 
in  1900;  in  1903  it  was  9.8  cents,  or  over  150  per  cent  greater. 

The  remission  of  the  internal  revenue  taxes  on  the  other 
tobacco  products  during  1901  and  1902  had  substantially  the 
same  result;  the  trust  absorbed  the  gains  (or  practically  all  of 
them)  that  were  presumably  intended  for  the  consmners  of 
tobacco. 

In  1910  the  reverse  situation  appeared  in  part.  In  that  year 
the  internal  revenue  tax  was  increased  somewhat  all  along  the 
line,  and  this  added  burden  was  largely  borne  by  the  trust. 
While  in  the  smoking  and  fine-cut  branches  prices  were  ad- 
vanced, these  increases  being  passed  along  by  the  jobber  to  the 
consumer,  in  the  cigarette,  little  cigar,  plug,  and  snuff  branches, 
the  trust  advanced  its  price  to  the  jobber  but  slightly,  and  the 
jobber  absorbed  the  increase,  leaving  the  price  to  the  consumer 
unchanged.^  The  trust  might  have  reduced  the  quantities  of 
these  products  in  the  retail  packages,  as  it  did  in  the  smoking 
tobacco  and  fine-cut  branches,  but  this  would  generally  have 
doubled  the  profits, — a  step  that  did  not  seem  advisable, 
especially  in  view  of  the  pending  dissolution  suit. 

Similar  price  statistics  are  available  for  smoking  tobacco, 
snufif,  and  cigars.  However,  it  would  burden  the  record  unduly 
to  insert  them  here.  Yet  a  comparison  of  the  snuff  and  cigar 
businesses  with  respect  to  their  profits  is  of  great  significance.  Of 
all  the  branches  of  the  tobacco  industry,  the  snuff  branch  is  the 
most  highly  monopolized,  while  the  cigar  branch  is  the  only  one 
the  trust  has  been  unable  to  dominate.  The  table  on  page  160 
shows  for  the  trust  in  these  two  lines  the  percentage  of  the  price 
which  represented  profits  (not  the  profit  per  pound  or  per 
thousand).^ 

During  the  years  1901-1910,  from  54.1  per  cent  to  73.7  per 
cent  of  the  price  of  snuff  stood  for  cost,  and  from  45.9  per  cent  to 
26.3  per  cent  represented  profit.    For  cigars  (leaving  out  of  con. 

*  Report  on  the  Tobacco  Industry,  part  III,  p.  7. 
2  Ibid.,  pp.  142,  199. 


l6o     THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 


Rate  of  Profit  (percentage  that  profit  was  of  the  price)  on  Snuff 
AND  Domestic  Cigars,  1900-1910 


Year 

Snuff 

Domestic 
cigars  ' 

1900 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

1910 

18.2 
26.3 
33-7 
37-1 
41-5 
41.8 

45-9 
44.0 

43-7 
43-8 
44-9 

0.62 

22.52 
II. 2  '^ 

4.4^^ 
6.0 
10.7 
10. 0 

3-9 
8.6 
5-8 

sideration  the  years  1901-1904,  when  the  tobacco  trust  was 
trying  to  capture  the  cigar  business)  the  cost  of  manufacture 
ranged  from  89.3  per  cent  to  96.1  per  cent  of  the  price,  and  the 
profit,  therefore,  ranged  from  3.9  per  cent  to  10.7  per  cent  of 
the  price.  If  we  take  the  year  1906  (when  the  profits  in  the 
cigar  branch  were  greatest),  it  appears  that  the  rate  of  profit  in 
the  highly  monopoHzed  snuff  business  exceeded  the  rate  of  profit 
in  the  competitive  cigar  industry  by  well  over  four  times.  A 
similar  comparison  made  for  the  other  branches  would  show  that 
the  trust's  rate  of  profit  in  the  cigarette,  plug,  smoking  tobacco, 
and  httle  cigar  business  exceeded  its  rate  of  profit  in  the  domestic 
cigar  business  by  three,  three,  two  and  a  half,  and  two  times, 
respectively.'^  It  is  also  significant  that  the  cigar  branch  was 
the  only  one  in  which  the  price,  either  with  or  without  tax, 
showed  a  declining  tendency  during  the  ten  years  ending  in  1910. 
The  net  price  less  tax  on  the  trust's  domestic  cigars  averaged 
$27.83  per  thousand  in  1901,  and  only  $24.50  in  1910.  The  bear- 
ing of  these  figures  on  the  general  question  of  monopoly  versus 
competition  is  obvious. 

'  Excludes  stogies,  cheroots,  and  package  cigars. 

^  Loss. 

^  Report  on  the  Tobacco  Industry,  part  III,  p.  200. 


THE  AMERICAN  TCBACCX)  COMPANY  i6l 

The  price  tables  presented  above  are  for  wholesale  prices,— 
the  prices  paid  by  jobbers.  The  prices  paid  by  consumers  during 
this  period  did  not  increase  in  anything  like  the  same  proportion; 
in  fact,  during  the  period  from  1901  to  July,  1910,  there  were 
practically  no  changes  in  the  retail  prices  of  the  trust's  principal 
brands  of  cigarettes,  little  cigars,  and  manufactured  tobacco.^ 
It  follows,  therefore,  that  during  this  period  the  trust  was 
gradually  encroaching  upon  the  margin  between  the  jobber's 
and  the  consumer's  price.  In  part  this  may  be  explained  by  the 
trust's  policy  of  performing  itself  to  a  large  extent  the  function 
of  pushing  the  sale  of  its  goods  (thus  reducing  the  jobbers'  ex- 
penses and  making  it  possible  for  them  to  get  along  on  a  lower 
margin).    In  part  also  it  testified  to  the  great  power  of  the  trust. 

We  turn  next  to  an  analysis  of  the  profits  of  the  tobacco 
trust.  The  table  on  page  162  shows  for  the  American  Tobacco 
Company  the  earnings  and  dividends  on  the  common  stock  for 
the  years  1890  to  1903  (in  1904  the  American  Tobacco  Company 
and  the  Continental  Tobacco  Company  were  merged). 

The  earnings  of  the  American  Tobacco  Company  have  been 
handsome,  and  especially  in  the  early  years.  The  average  for  the 
nine  years  1890  to  1898,  embracing  a  period  of  severe  industrial 
depression,  was  17.7  per  cent,  not  counting  the  profits  realized 
from  the  sale  of  the  plug  business  to  the  Continental  Tobacco 
Company.  If  these  are  included,  the  earnings  averaged  as  high 
as  25.7  per  cent.^  The  declaration  of  a  100  per  cent  stock  divi- 
dend in  1899  naturally  reduced  the  rate  of  earnings,  yet  in  spite 
of  this  dilution  of  the  stock  as  much  as  13.8  per  cent  was  earned 
in  1903. 

The  dividends  paid  were  also  liberal.  In  the  fourteen  years 
prior  to  the  merger,  the  dividends  declared  on  the  common  stock, 
including  stock  dividends  and  scrip,  averaged  about  15  per  cent 
per  annum.  This  common  stock  was  largely  water.  At  its  organ- 
ization in  1890  the  American  Tobacco  Company  had  issued  $10,- 
000,000  preferred  stock  and  $15,000,000  common.  According  to 
the  Bureau  of  Corporations,  the  tangible  assets  of  the  five  com- 

1  Report  on  the  Tobacco  Industry,  part  III,  p.  7, 

2  Ibid.,  part  II,  p.  58. 


1 62        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Earnings  and  Dividends  of  American  Tobacco  Company  on  its 
Common  Stock,  1890-1903  ^ 


Profits  available  for  distribu- 
tion on  common  stock   after 
paying  dividends  on  preferred 
stock    and   interest   on   scrip 

Year 

Common  stock 

Amount 

Per  cent 

Rate  of  divi- 
dend paid  on 
common  stock 

1890  

$15,000,000 
17,900,000 
17,900,000 
17,900,000 
17,900,000 
17,900,000 
17,900,000 
17,900,000 
21,000,000 
54,500,000 
54,500,000 
54,500,000 
54,500,000 
54,500,000 

$1,711,180 
3,441,994 
3,760,501 
3,373,167 
4,114,615 
2,911,693 
2,475,176 
2,995,300 

3,735,983 
3,890,240 
5,002,663 
5,346,224 
6,270,291 
7,544,784 

11-4 
19.  2 
21 .0 
18.8 
23.0 
16.3 
13-8 
16.7 
17.82 

71 
9.2 
9.8 

II-5 
13-8 

10.0 

1891 

12.0 

1892 

12.0 

1893 

12.0 

i8qa   

12.0 

1805 

9.0 

1896 

29.0 ' 

1807    

8.0 

1898 

8.0 

180Q 

106.5* 

1900 

6.0 

IQOI 

6.0 

ig02          

10. 0 

1903 

12.0 

panics  which  united  to  form  the  trust  aggregated  $3,545,108,  and 
the  good  will  (which  was  recognized  as  a  legitimate  factor  in  the  in- 
vestment, because  it  had  generally  been  built  up  by  large  expendi- 
tures for  advertising,  etc.)  certainly  did  not  exceed  $8,954,892.'' 
As  a  very  liberal  estimate  the  value  of  the  business  (allowing  for 
the  $1,825,354  in  notes  given  by  the  organizers)  was  only  $14,325,- 
000,  and  property  of  this  amount  was  represented  by  $10,000,- 
cx)o  of  8  per  cent  preferred  stock  and  by  $15,000,000  of  common 

^Original  Petition  in  United  States  v.  American  Tobacco  Company, 
pp.  78-84,  and  Report  on  the  Tobacco  Industry,  part  II,  p.  57. 

2  Does  not  include  the  profits  received  from  the  sale  of  the  plug  business. 

3  9  per  cent  i)aid  in  cash;  20  per  cent  in  scrip,  afterward  redeemed  at  its 
face  value,  with  interest  at  6  per  cent  from  May  i,  1896. 

''  Includes  100  per  cent  stock  dividend. 

*  Report  on  the  Tobacco  Industry,  part  II,  pp.  8-9. 


THE  AMERICAN  TOBACCO  COMPANY  163 

stock.  Over  two-thirds  of  the  common,  tlierefore,  was  water. 
Thus,  the  American  Tobacco  Company,  though  paying  10  per 
cent  dividends  in  1S90,  was  actually  paying  at  least  34  per  cent 
on  the  value  of  that  part  of  its  property  which  stood  back  of  the 
common  stock.  The  fact  that  it  was  able  from  the  very  start  to 
pay  excellent  dividends  on  its  whole  capitalization  indicates 
that  a  high  degree  of  monopoHstic  control  had  been  effected. 

Similar  data  might  be  presented  in  detail  for  the  Continental 
Tobacco  Company  from  1899  to  1903;  for  the  Consolidated 
Tobacco  Company  from  1901  to  1904;  and  for  the  reorganized 
American  Tobacco  Company  from  1904  to  1908.  It  will  suflSce 
to  point  out  that  even  on  the  capitalization  basis  the  earnings  of 
these  companies  and  the  dividends  paid  were  very  liberal.  The 
reorganized  American  Tobacco  Company,  for  example,  earned  on 
its  common  stock  during  the  years  1905  to  19 10  an  average  of 
over  50  per  cent;  and  paid  dividends  averaging  over  29  per  cent.^ 

The  foregoing  statistics  give  a  fairly  satisfactory  idea  of  the 
profits  of  the  trust.  But  for  two  reasons  they  do  not  portray  the 
situation  accurately.  In  the  first  place,  the  capitalization  was  an 
arbitrary  figure;  and,  in  the  second  place,  the  earnings  were  not 
the  actual  earnings,  but  merely  those  shown  on  the  companies' 
books.  The  Bureau  of  Corporations  therefore  attempted  in  its 
elaborate  investigation  of  the  profits  of  the  tobacco  business  to 
ascertain  as  accurately  as  it  could  the  investment  and  the  actual 
earnings, — that  is,  to  determine  what  the  money  invested  in  the 
tobacco  manufacture  had  really  earned.  Space  is  not  available 
to  present  the  results  of  this  study;  ^  it  must  sufl&ce  to  say  that 
after  1901,  by  which  date  effective  control  had  been  secured  over 
practically  all  branches  of  the  tobacco  industry,  the  earnings  of 
the  tobacco  trust  on  its  entire  business  closely  approximated  the 
large  profits  obtained  by  the  American  Tobacco  Company  dur- 
ing the  earlier  period  when  it  almost  completely  monopolized  the 
cigarette  business. 

1  Moody's  Manual,  1911,  p.  2696.  No  dividends  were  paid  in  1904,  the 
year  in  which  the  American  Tobacco  Company  was  organized. 

2  The  interested  reader  is  referred  to  Report  on  the  Tobacco  Industry, 
part  II  (Capitalization,  Investment,  and  Earnings). 


CHAPTER  VIII 

THE  UNITED  SHOE  MACHINERY  COMPANY ' 

Practically  all  of  the  shoes  now  made  in  this  country  are  manu- 
factured by  machinery.  In  1915  there  were  over  1,500  manufac- 
turers of  shoes  scattered  throughout  the  country,  producing 
annually  in  the  aggregate  more  than  300,000,000  pairs  of  machine- 
made  shoes.  A  very  important  group  of  these  machines  is  that 
used  to  prepare  and  attach  the  soles  to  the  uppers, — a  process 
known  in  the  trade  as  bottoming.  The  more  important  of  the 
bottoming  machines,  without  which  factory  shoes  can  not  profit- 
ably be  made,  are  the  lasting  machines,  the  welt-sewing  machines, 
the  outsole-stitching  machines,  the  heeling  machines,  and  the 
metallic-fastening  machines.^  By  the  year  1899,  through  a  proc- 
ess of  combination,  there  had  developed  a  dominating  concern 
in  the  manufacture  of  each  one  of  these  groups  of  machines.  The 
Consolidated  and  McKay  Lasting  Machine  Company  under 
letters  patent  manufactured  60  per  cent  of  the  lasting  ma- 
chines made  in  this  country;  the  Goodyear  Shoe  Machinery  Com- 
pany produced  80  per  cent  of  the  outsole-stitching  machines, 
and  10  per  cent  of  the  lasting  machines;  and  the  McKay  Shoe 
Machinery  Company  made  70  per  cent  of  the  heeling  ma- 
chines, and  80  per  cent  of   the  metallic-fastening  machines.^ 

'  On  the  United  Shoe  Machinery  Company  see:  Original  Petition  in  United 
States  V.  United  Shoe  Machinery  Company  in  the  district  court  of  the 
United  States  for  the  eastern  district  of  Missouri;  Brief  for  the  United  States 
in  United  States  v.  United  Shoe  Machinery  Company  (no.  207);  227  U.  S. 
202-218;  222  Fed.  Rep.  349-415;  247  U.  S.  32-91;  264  Fed.  Rep.  138-175; 
Report  of  the  Senate  Committee  on  Interstate  Commerce  on  the  Control  of 
Corporations,  1913;  Hearings  on  Trust  Legislation  held  before  the  House 
Committee  on  the  Judiciary,  1913-1914;  Roe,  Journal  of  Political  Economy, 
21,  pp.  938-953,  and  22,  pp.  43-63. 

^  For  a  description  of  these  machines  and  of  the  process  of  shoe  manufac- 
ture, see  Brief  for  the  United  States  (no.  207),  pp.  7-15. 

^  See  227  U.  S.  215.    Mr.  Winslow,  president  of  the  United  Shoe  Machin- 

164 


THE  UNITED  SHOE  MACHINERY  COMPANY  165 

The  heads  of  the  Consolidated  Company  and  the  Goodyear  Com- 
pany in  negotiations  begun  in  1898  discussed  a  "working  agree- 
ment" between  the  two  companies,  but  this  proposed  arrange- 
ment was  given  up  because  of  the  objections  of  the  head  of  the 
Goodyear  Company.  This  gentleman,  who  was  a  lawyer,  "  had 
a  sort  of  indefinite  idea  that  it  might  be  deemed  to  be  a  combina- 
tion in  restraint  of  trade,"  and  he  therefore  insisted  upon  a  com- 
plete consolidation,  the  illegality  of  which  (as  a  device  for  organ- 
izing trusts)  was  less  certain  at  that  time.^ 

Accordingly  on  February  7,1899,  the  United  Shoe  Machinery 
Company  was  incorporated  in  New  Jersey  with  an  authorized 
capital  stock  of  $25,000,000.  The  new  company  acquired  all  the 
stock  of  the  three  concerns  mentioned  above,  as  well  as  four 
other  concerns,  to  wit,  the  International  Goodyear  Shoe  Ma- 
chinery Company,  the  Davey  Pegging  Machine  Company,  the 
Eppler  Welt  Machine  Company,  and  the  International  Eppler 
Welt  Machine  Company.^  These  companies  conveyed  to  the 
United  Company  all  of  their  business,  including  their  patent 
rights  in  the  United  States  and  foreign  countries.^  The  United 
Company  thus  became  an  operating  concern.  It  soon  concen- 
trated the  manufacture  of  its  machines  at  a  new  plant  in  Beverly, 
Massachusetts;  and  here  the  greater  number  of  its  machines 
are  now  made.  The  effect  of  the  combination  of  1899,  accord- 
ing to  counsel  for  the  government,  was  to  give  one  concern  con- 
trol over  70  to  80  per  cent  of  the  total  output  of  bottoming  room 
machinery  (the  company,  it  should  be  noted,  did  not  secure 
control  of  the  machinery  used  in  the  sole  leather  room,  the 
stitching  room,  or  the  finishing  room).^  After  its  organization 
the  United  Company  acquired  some  fifty  other  concerns  manu- 
facturing shoe  machinery  or  supplies.^  As  the  result  of  the 
original  combination  and  subsequent  acquisitions  the  United 
Company  obtained  a  complete  line  of  the  principal  and  auxiliary 

ery  Company,  testified  that  the  McKay  Shoe  Machinery  Company  produced 
nearly  all  of  the  heeling  and  metallic-fastening  machines  that  were  being 
made  in  the  United  States.    247  U.  S.  81. 

1  247  U.  S.  77. 

-  Ibid.,  38-39.  *  227  U.  S.  205. 

*  Ibid.,  39.  *  Brief  for  the  United  States  (no.  207),  p.  67. 


1 66       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

machines  used  in  the  bottoming  of  shoes.  Formerly,  as  stated 
above,  certain  companies  had  held  a  monopolistic  position  with 
respect  to  individual  bottoming  room  machines,  but  no  one 
had  a  full  line,  and  no  one  has  a  full  line  at  the  present  time, 
except  the  United  Shoe  Machinery  Company.^ 

Not  only  is  the  United  Company  the  only  American  concern 
possessing  a  full  line,  but  it  has  a  highly  monopolistic  position  in 
the  manufacture  of  the  leading  bottoming  room  machines, — and 
it  is  with  respect  to  bottoming  room  machinery  that  the  contro- 
versy of  the  government  with  the  United  Company  deals.  In 
the  Brief  for  the  United  States  there  is  an  exhibit  that  shows 
the  number  of  principal  bottoming  machines  (together  with 
clicking  machines)  which  the  United  Company  and  its  competi- 
tors had  out  on  March  i,  191 1.-  This  exhibit  is  reproduced  be- 
low, the  percentages  being  supplied  by  the  author. 

Machines  put  out  to  Shoe  Manufacturers  in  the  United  States, 
March  i,  1911 

Machines  By  defendants 

Clicking  machines 3,655 

Pulling-over  machines i  ,63  2 

Lasting  machines  ^ 7,496 

Standard  screw  machines  * 409 

Pegging  machines  * 146 

Tacking  machines  * 3,488 

Welt-sewing  machines  * 2,527 

Outsole-stitching  machines  ^ 2,676 

Loose-nailing  machines  * 1,835 

Heeling  machines  * 2,019 

Slugging  machines 1,876 

McKay  sewing  machines 898 

28,657  985  3.44 

'  Brief  for  the  United  States  (no.  207),  p.  134. 

^This  table  was  constructed  from  the  uncontradicted  evidence  of  eighty- 
five  witnesses,  from  an  exhibit  of  the  United  Company,  and  from  other 
sources.    See  Brief  for  the  United  States  (no.  207),  p.  150. 

^  The  figures  for  these  machines  are  reproduced  in  the  opinion  of  Justice 
Clarke  (247  U.  S.  89),  who  states  that  they  arc  not  seriously  disputed  by 
counsel  for  the  United  Shoe  Machinery  Company. 


Per  cent  of 

By  all  others 

competition 

none 

0.00 

none 

0.00 

7 

O.OI 

none 

0.00 

none 

0.00 

6 

0.02 

142 

5-30 

758 

22.07 

24 

1.30 

17 

0.83 

23 

I.  21 

8 

0.87 

THE  UNITED  SHOE  MACHINERY  COMPANY  167 

From  this  table  it  appears  that  in  only  one  bottoming  room 
machine — the  outsole-stitching  machine — did  the  United  Shoe 
Machinery  Company  have  important  competition.  The  inde- 
pendent companies  made  (191 1)  22.07  P^r  cent  of  the  outsole- 
stitching  machines;  and  the  United  Company  made  77.93  per 
cent.  Of  every  other  machine  the  United  Company  made  at 
least  94  per  cent,  and  in  some  cases  100  per  cent.  Taking  all 
these  machines  together  the  trust  made  96.56.  per  cent.  The 
petition  of  the  government  even  charged  that  the  United  Com- 
pany made  98^  per  cent  of  the  machinery  and  supplies  used  in 
the  bottoming  of  shoes.  ^ 

In  addition  the  shoe  machinery  trust  had  a  very  strong  hold 
on  the  business  of  foreign  countries."  The  British  United  Shoe 
Machinery  Company  supplied  all  of  the  installed  shoe  machinery 
equipment  in  Ireland,  practically  all  in  Scotland,  and  some  80 
per  cent  in  England.  Other  affiliated  companies  furnished  90 
per  cent  of  the  shoe  machinery  equipment  of  Italian  factories, 
and  75  per  cent  of  that  of  French  factories.  United  machines 
were  sold  also  in  Germany,  Austria,  Belgium,  Russia,  Denmark, 
Norway,  Sweden,  Spain,  Switzerland,  and  undoubtedly  other 
countries. 

To  what  may  be  the  ability  of  the  United  Shoe  Machinery 
Company  to  attain  a  monopolistic  position  in  the  industry'  be 
attributed?  It  can  not  be  ascribed  to  tariff  barriers.  There 
have  been  duties  on  the  importation  of  shoe  machinery  (though 
none  since  1913),  yet  the  ability  of  the  United  Company  to  com- 
pete so  effectively  in  foreign  lands  shows  conclusively  that  its 
strong  position  at  home  is  not  to  be  explained  in  this  way. 
Neither  does  it  appear  to  have  benefited  by  railway  favors. 
Furthermore,  no  monopoly  of  a  natural  resource  has  been 
effected.    To  what,  then,  may  it  be  attributed? 

In  the  first  place,  the  strength  of  the  shoe  machinery  trust 
was  due  to  the  original  act  of  combination  in  1899.    The  mere 

1  Original  Petition  in  United  States  v.  United  Shoe  IMachinery  Company, 
pp.  15-16. 

2  See  the  Shoe  and  Leather  Trade  series  of  the  Department  of  Commerce 
and  Labor,  1912-1913. 


1 68        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

union  under  one  management  of  a  group  of  concerns,  each  of 
which  had  a  dominant  position  in  its  special  hne  of  bottoming 
room  machinery,  gave  the  United  Company  a  substantial 
monopoly  of  all  such  machinery.  A  vital  question  is  the  proper 
public  policy  to  be  adopted  with  respect  to  such  combinations. 
In  this  connection  the  remarks  of  the  Supreme  Court  are  of 
interest.  Speaking  of  the  organization  of  the  United  Shoe 
Machinery  Company  in  1899  it  said:  "On  the  face  of  it  the  com- 
bination was  simply  an  effort  after  greater  efficiency.  The  busi- 
ness of  the  several  groups  that  combined,  as  it  existed  before  the 
combination,  is  assumed  to  have  been  legal.  The  machines  are 
patented,  making  them  a  monopoly  in  any  case  .  .  .  and  it 
may  be  assumed  that  the  success  of  the  several  groups  was  due 
to  their  patents  having  been  the  best.  As,  by  the  interpretation 
of  the  indictment  belov/,  195  Fed.  Rep.  591,  and  by  the  admis- 
sion in  argument  before  us,  they  did  not  compete  with  one 
another,  it  is  hard  to  see  why  the  collective  business  should  be 
any  worse  than  its  component  parts.^  It  is  said  that  from  sev- 
enty to  eighty  per  cent,  of  all  the  shoe  machinery  business  was 
put  into  a  single  hand.  This  is  inaccurate,  since  the  machines  in 
question  are  not  alleged  to  be  types  of  all  the  machines  used  in 
making  shoes,  and  since  the  defendants'  share  in  commerce 
among  the  States  does  not  appear.  But  taking  it  as  true  we  can 
see  no  greater  objection  to  one  corporation  manufacturing  sev- 
enty per  cent,  of  three  noncompeting  groups  of  patented  ma- 
chines collectively  used  for  making  a  single  product  than  to  three 

1  In  this  case  the  Supreme  Court  did  not  find  that  the  companies  combined 
were  noncompeting;  it  merely  accepted  the  construction  put  on  the  indict- 
ment by  the  lower  court.  But  in  247  U.  S.  41,  47,  the  Court  (four  judges)  did 
assert  that  the  companies  that  united  to  form  the  United  Shoe  Machinery 
Company  were  not  competitive.  However,  the  dissenting  opinion  (three 
judges)  declared  that  some  of  the  companies  were  competitive,  and  intro- 
duced testimony  of  the  leading  officials  of  the  company  that  substantiated 
this  contention  (247  U.  S.  82-83).  The  matter  is  highly  important  since  the 
decision  of  the  Supreme  Court  turned  on  this  point.  By  the  majority  opinion 
the  United  Shoe  Machinery  Company  was  declared  to  be  in  essence  a  union 
of  several  patent  monopolies,  which  was  not  forbidden  by  the  Sherman  Act. 
For  a  discussion  of  the  decisions  of  the  Supreme  Court,  see  pp.  431,  432. 


THE  UNITED  SHOE  MACHINERY  COMPANY  169 

corporations  making  the  same  proportion  of  one  group  each. 
The  disintegration  aimed  at  by  the  statute  does  not  extend  to 
reducing  all  manufacture  to  isolated  units  of  the  lowest  degree. 
It  is  as  lawful  for  one  corporation  to  make  every  part  of  a  steam 
engine  and  to  put  the  machine  together  as  it  would  be  for  one  to 
make  the  boilers  and  another  to  make  the  wheels."  ^ 

The  law  is  thus  clear.  The  United  Shoe  Machinery  Company 
combined  in  1899  a  number  of  noncompeting  concerns,  and  es- 
tablished a  monopoly  of  a  very  important  line  of  shoe  machinery. 
But  the  patent  law  contemplates  and  permits  monopoly,  hence 
the  act  of  combination  was  not  illegal.  In  other  words  we  are 
dealing  here  with  a  patent  trust, — a  trust  supported  by  legisla- 
tion. Without  criticizing  the  principle  of  our  patent  legislation 
it  must  be  clear  that  the  existence  and  power  of  the  United  Shoe 
Machinery  Company  does  not  necessarily  lend  support  to  the 
argument  that  trusts  inevitably  evolve  because  of  their  superior 
efficiency.  The  United  Shoe  Machinery  Company  would  appear 
to  have  evolved  because  a  monopoly  was  profitable,  and  sanc- 
tioned by  law. 

As  to  the  economics  of  the  matter,  there  are,  as  a  matter  of 
course,  more  or  less  plausible  arguments  advanced  for  a  shoe 
machinery  trust  protected  by  patents  (as  there  are  for  every 
other  trust),  as,  for  example,  the  following:  "Shoe  manu- 
facturing had  become  a  highly  complicated  industry.  In 
making  Goodyear  welt-shoes,  one  hundred  and  eighty-five 
distinct  operations  were  necessary,  of  which  one  hundred  and 
fifty-seven  were  machine  operations.  Few  machines  could  per- 
form more  than  one  or  two  of  these  operations.  In  every  shoe 
factory,  therefore,  a  great  many  different  machines  had  to  be 
assembled,  adjusted  to  work  in  absolute  harmony,  and  kept  in 
perfect  operation.  If  any  machine  broke  down  or  got  out  of 
adjustment,  the  industrial  chain  was  broken,  and  all  the  machin- 
ery in  the  factory  had  to  stand  idle  until  the  broken  link  was 
restored.  The  shoe  manufacturer,  consequently,  was  always 
at  the  mercy  of  his  weakest  machine.    His  product  was  always 

^  227  U.  S.  217-218.    The  validity  of  the  leases  with,  their  tying  clauses 
(see  pp.  171  ff.)  was  not  before  the  court  in  this  case. 


1 70       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

limited  by  the  delay  and  inadequacy  of  the  service  furnished  by 
the  weakest  manufacturer  from  whom  he  obtained  machinery. 
Every  other  machinery  manufacturer,  whose  machines  were 
prevented  from  earning  royalties  during  this  enforced  idleness, 
was  also  a  sutTerer.  He,  no  less  than  his  customer,  was  always  at 
the  mercy  of  the  weakest  machines  in  his  customer's  factory. 
His  royalties  from  his  machines  were  always  limited  by  the  delay 
and  inadequacy  of  the  service  which  his  competitor  furnished  to 
their  common  customer. 

"Such  instability  could  not  endure.  Breakdowns  multiplied; 
repair  bills  became  intolerable;  continuous  operation  was  never 
certain;  production  costs  could  never  be  predicted;  promises  of 
definite  dehveries  could  not  be  fulfilled;  machines  bought  out- 
right soon  became  worthless;  large  customers  demanded  and 
frequently  obtained  rebates  over  their  smaller  competitors; 
enforced  idleness  caused  by  inefficient  machinery  service  re- 
sulted in  frequent  turmoils  of  factory  operatives;  an  up-to-date 
shoe  factory  involved  such  large,  unforeseeable  outlays  as  to 
become  almost  a  financial  impossibility."  ^ 

However  accounted  for,  it  gradually  came  about  that  the  mak- 
ing of  machinery  for  the  bottoming  operations  in  shoe  manufac- 
ture centered  in  three  noncompeting  groups.  The  movement 
might  have  stopped  there.  The  concentration  of  the  bottoming 
machinery  in  the  hands  of  three  concerns  would  have  obviated 
many  of  the  difficulties  referred  to  above,  as  it  would  naturally 
have  been  to  the  decided  interest  of  each  of  these  concerns  to 
permit  continuous  use  of  their  machines.  But  the  movement 
went  on,  and  in  1899,  as  we  have  seen,  the  three  groups  united 
to  form  the  United  Shoe  Machinery  Company.  The  forma- 
tion of  this  company  was  legal,  and,  according  to  the  Supreme 
Court,  "  on  the  face  of  it  simply  an  effort  after  greater  efficiency." 
Probably  efficiency  would  have  been  equally  promoted,  and  the 
public  interest  better  protected,  by  the  existence  side  by  side  of 
several  concerns,  each  making  a  full  line  of  bottoming  machinery, 
though  one  must  not  speak  too  dogmatically  on  the  basis  of 

*  Roe,  Journal  of  Political  Economy,  21,  pp.  941-942.  For  the  opposing 
view  see  Brief  for  the  United  States  (no.  207),  pp.  226-229. 


THE  UNITED  SHOE  MACHINERY  COMPANY  17 1 

present  knowledge.  Furthermore,  it  would  be  quite  possible, 
if  public  opinion  is  opposed  to  patent  trusts,  to  have  the 
federal  government  acquire  the  patent  rights  on  its  own  account, 
and  throw  open  the  invention  to  general  use,  due  compensation 
being  made  to  the  inventor  to  reward  him  for  his  labor  and  finan- 
cial outlays.  While  invention  will  be  stimulated  and  industrial 
progress  promoted  by  proper  encouragement  in  a  financial  way 
to  inventors,  it  is  by  no  means  certain  that  that  encouragement 
could  not  be  given  without  permitting  at  the  same  time  the 
establishment  of  patent  monopolies.^  If  then  it  appeared  that 
it  were  more  efificient  for  all  the  machinery  in  a  given  shoe  fac- 
tory to  be  owTied  by  one  company,  it  would  still  be  possible  for 
individual  manufacturers  to  lease  all  their  machinery  from  one 
company,  with  the  alternative,  however,  of  turning  to  other 
manufacturers  upon  the  expiration  of  the  leases,  in  the  event 
that  the  service  was  not  satisfactory.  By  this  arrangement  the 
government  would  hold  the  patents,  and  active  competition  in 
the  business  of  manufacturing  shoe  machinery  and  supplying 
shoe  machinery  service  would  be  possible,  as  it  is  not  now,  be- 
cause of  the  fact  that  many  of  the  essential  patents  are  owned 
by  one  company. 

In  the  second  place,  the  strength  of  the  United  Shoe  Machin- 
ery Company  was  the  result  of  the  so-called  tying  clauses  in  its 
leases.  The  United  Company  did  not  sell  its  principal  machines; 
it  merely  leased  them  to  shoe  manufacturers  at  a  royalty  of  so 
much  per  pair  of  shoes.  The  provisions  of  the  leases  are  very 
important,  and  deserve  detailed  consideration.  For  this  purpose 
we  shall  take  the  leases  for  lasting  machines, — one  of  the  essen- 
tial machines. 

The  principal  provisions  of  the  lasting  machine  leases  are  (in 
substance  and  condensed  form) :  ^ 

Sec.  I.    The  leased  machinery  shall  at  all  times  remain  the 

^  It  should  be  realized  that  a  monopoly  in  shoe  machiner>'  of  certain  types 
is  likely  to  discourage  invention,  since  there  will  be  no  competition  for  the 
product  of  the  inventor,  and  his  reward  will  therefore  be  limited. 

2  A  copy  of  a  lasting  machine  lease  is  in  the  Report  of  the  Senate  Commit- 
tee on  the  Control  of  Corporations,  pp.  2170-2174. 


172        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

exclusive  property  of  the  lessor  (the  United  Company).  The 
lessor  and  its  agents  and  employees  shall  at  all  times  be  given 
access  to  the  leased  machinery  for  the  purpose  of  inspecting  it, 
watching  its  operation,  repairing  it,  or  determining  the  extent  of 
its  use. 

Sec.  2.  The  lessee  (the  shoe  manufacturer)  shall  at  his  own 
expense  keep  the  leased  machinery  in  good  working  order.  He 
shall  obtain  from  the  lessor  exclusively,  and  shall  pay  therefor 
at  the  regular  prices  from  time  to  time  established  by  the  lessor,^ 
all  the  duplicate  parts  and  extras  needed  in  operating  or  repairing 
the  leased  machinery. 

Sec.  5.  The  leased  machinery  shall  be  used  for  no  other  pur- 
pose than  for  lasting  shoes  or  other  footwear  made  by  or  for  the 
lessee.  The  leased  machinery  shall  not,  nor  shall  any  part 
thereof,  be  used  in  the  manufacture  of  any  welted  shoes  or  other 
footwear,  or  portions  thereof,  which  have  been  or  shall  be  welted 
in  whole  or  in  part,  or  the  soles  of  which  have  been  stitched,  by 
the  aid  of  any  welt-sewing  or  sole-stitching  machinery  not  held 
by  the  lessee  under  lease  from  the  lessor;  or  in  the  manufacture 
of  any  turned  shoes  or  other  footwear  or  portions  thereof,  the 
soles  of  which  have  been  or  shall  be  in  whole  or  in  part  attached 
to  their  uppers  by  the  aid  of  any  turn-sewing  machinery  not 
held  by  the  lessee  under  lease  from  the  lessor;  or  in  the  manu- 
facture of  any  shoes  or  other  footwear  which  have  or  shall  be  in 
whole  or  in  part  pulled  over,  slugged,  heel  seat  nailed,  or  other- 
wise partly  made  by  the  aid  of  any  pulling-over  or  "Metallic" 
machinery  not  held  by  the  lessee  under  lease  from  the  lessor. 
Subject  to  the  foregoing  limitations,  the  lessee  shall  use  the 
leased  machinery  to  its  full  capacity  upon  all  shoes  or  other  foot- 
wear, or  portions  thereof,  made  by  or  for  the  lessee  in  the  manu- 
facture of  which  such  machinery  is  capable  of  being  used. 

Sec.  6.  The  lessee  shall  pay  to  the  lessor  as  royalty  the  sum  of 
I  1/4  cents  for  each  pair  of  shoes  or  portion  thereof  lasted  by  the 
aid  of  the  leased  machinery. 

Sec.  8.    If  at  any  time  the  lessee  shall  fail  or  cease  to  use 
exclusively  ^  lasting  machinery  held  by  him  under  lease  from  the 
^  Italics  supplied  by  the  author.  "^  Ibid. 


THE  UNITED  SHOE  MACHINERY  COMl'ANY  173 

lessor  for  lasting  all  shoes  made  by  him  or  for  him  which  are 
lasted  by  the  aid  of  machinery,  the  lessor  may  at  its  option  ter- 
minate forthwith,  by  notice  in  writing,  any  or  all  leases  of  lasting 
machines  then  existing  between  the  lessor  and  the  lessee;  and 
the  possession  of  the  lasting  machine  shall  thereupon  be  revested 
in  the  lessor  free  from  any  claims  whatever. 

Sec.  9.  This  lease  shall  continue,  unless  sooner  terminated  by 
the  lessor  because  of  breach  thereof  on  the  part  of  the  lessee,  for 
seventeen  years.  But  if  any  breach  shall  be  made  in  the  observ- 
ance of  any  one  or  more  of  the  conditions  contained  herein  or 
contained  in  any  other  lease  subsisting  between  the  lessor  and 
the  lessee,  the  lessor  shall  have  the  right,  by  notice  in  writing 
to  the  lessee,  to  terminate  forthwith  any  or  all  ^  leases  to  use 
machinery  then  in  force  between  the  lessor  and  the  lessee.  Upon 
the  expiration  of  this  lease  or  its  termination  by  notice,  the  lessee 
shall  forthwith  deliver  the  leased  machinery  to  the  lessor  at 
Beverly,  Massachusetts,  in  good  order;  and  shall  thereupon 
pay  to  the  lessor  the  sum  of  $150  in  respect  to  each  lasting 
machine  hereby  leased,  as  partial  reimbursement  for  deteriora- 
tion of  the  leased  machinery. 

Sec.  10.  In  case  at  any  time  the  lessee  shall  have  in  his  posses- 
sion more  lasting  machines  than,  in  the  opinion  of  the  lessor,  are 
needed  to  perform  the  work  which  the  lessee  has  for  such  ma- 
chines, the  lessor  may,  upon  thirty  days'  notice  in  writing,  termi- 
nate the  lease  to  use  any  one  or  more  of  the  lasting  machines 
hereby  leased.  In  case  any  lease  is  thus  terminated,  the  lessee 
shall  pay  to  the  lessor  such  sum  as  may  be  necessary  to  put  such 
machine  or  machines  in  suitable  condition  to  lease  to  another  lessee. 

Sec.  13.  The  lessee  admits  the  validity  for  the  full  term  ex- 
pressed in  the  grant  thereof  of  each  of  the  Letters  Patent  of  the 
United  States  owned  by  the  lessor. 

The  provisions  of  this  lease  bear  witness  to  the  power  of  the 
United  Shoe  Machinery  Company.  Shoe  manufacturers  would 
hardly  have  submitted  to  such  conditions  had  it  not  been  largely 
a  matter  of  necessity.  It  should  be  borne  in  mind,  however, 
that  it  is  not  the  leasing  system  itself  that  is  the  subject  of  com- 
^  Italics  supplied  by  the  author. 


174        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

plaint;  rather  it  is  the  tying  clauses  contained  in  the  leases. 
The  leasing  system,  in  fact,  possesses  distinct  advantages,  partic- 
ularly to  the  manufacturer  of  shoes  operating  on  a  compara- 
tively small  scale.  Were  it  necessary  for  a  shoe  manufacturer  to 
buy  his  shoe  machinery,  it  would  require  considerable  capital  to 
engage  in  the  business.  As  it  is,  the  machines,  with  all  that  is 
involved  in  the  way  of  invention  costs,  depreciation,  care  of 
machines,  cost  of  administration,  are  supplied  to  the  shoe 
manufacturer  at  a  comparatively  small  royalty  per  pair  of 
shoes.  The  evidence  is  that  the  United  Company  has  given  the 
same  terms  and  the  same  service  to  every  shoe  liianufacturer,  no 
matter  whether  he  was  doing  business  on  a  large  scale  or  on  a 
small  scale;  that  a  larger  capital  has  never  availed  to  secure  any 
favoritism  with  respect  to  machines  and  machine  service.^  As 
the  result  of  this  policy  competition  has  continued  quite  active  in 
the  shoe  industry. 

Since  it  is  not  the  practice  of  leasing  machinery  that  is  com- 
plained of,  but  rather  the  tying  clauses  in  the  leases,  it  will  be 
advisable  to  consider  more  fully  the  nature  of  these  tying  clauses 
and  their  significance. 

According  to  section  five  of  the  lasting  machine  lease  described 
above  a  shoe  manufacturer  leasing  a  lasting  machine  from  the 
United  Shoe  Machinery  Company  obligated  himself  not  to  use 
that  machine  in  the  manufacture  of  shoes  which  have  been  or 
shall  be  welted  in  whole  or  in  part  with  the  aid  of  any  welt-sew- 
ing machinery  not  held  by  the  manufacturer  under  lease  from 
the  United  Company;  nor  in  the  manufacture  of  shoes,  the  soles 
of  which  have  been  in  whole  or  in  part  stitched  with  the  aid  of 
sole-stitching  machinery  not  leased  from  the  United  Company; 
nor  in  the  manufacture  of  turned  shoes,  the  soles  of  which  have 
been  or  shall  be  in  whole  or  in  part  attached  to  their  u])pers  with 
the  aid  of  any  turn-sewing  machinery  not  leased  from  the  United 
Company;  nor  in  the  manufacture  of  shoes  which  have  been  or 
shall  be  in  whole  or  in  part  pulled  over,  slugged,  or  heel  seat 
nailed  with  the  aid  of  any  machinery  not  leased  from  the  United 

1  Report  of  the  Senate  Committee  on  Control  of  Corporations,  pp.  1160, 
1964,  2159. 


THE  UNITED  SHOE  MACHINERY  COMPANY  175' 

Company.  The  crux  of  the  whole  matter  is  that  the  shoe 
manufacturer  had  to  have  a  lasting  machine;  for  all  practi- 
cal purposes  he  could  get  one  only  from  the  United  Shoe  Ma- 
chinery Company;  ^  and  if  he  leased  one  from  the  company — it 
would  not  sell  him  one  under  any  circumstances — he  had  to  agree 
to  use  certain  other  machines  of  the  company,  notably  the 
welter,  stitcher,  and  metallic-fastening  machines.  That  is,  to 
the  essential  machines,  like  the  laster,  other  machines  were 
tied.  These  other  machines  might  not  be  as  good  as  those  of 
competing  shoe  machinery  manufacturers — it  is  not  intended,  of 
course,  to  say  that  they  were  not — but  if  the  shoe  manufacturer 
wished  to  use  a  laster  he  had  but  little  choice.  This,  in  effect,  re- 
strained him  in  the  use  of  competing  shoe  machinery.  The  gov- 
ernment in  its  petition  asking  that  the  court  declare  these  tying 
clauses  illegal  under  the  Clayton  Act  -  charged  that  competitors 
of  the  United  Company  were  prepared  to  supply  certain  kinds  of 
shoe  machinery  at  lower  prices  or  royalties  than  were  asked  by 
the  United  Company,  but  that  the  shoe  manufacturers  were  de- 
terred from  buying  or  leasing  them  by  the  tying  clauses,  and  by 
the  fear  of  the  serious  financial  consequences  that  would  attend 
their  violation.^  Competition  in  the  manufacture  of  shoe  ma- 
chinery was  thus  rendered  largely  impotent  by  the  tying  clauses. 
Counsel  for  the  United  Shoe  Machinery  Company  has  stated 
the  theory  of  the  tying  clauses:  "The  fundamental  machines  are 

*  President  Winslow  testified  that  "after  the  formation  of  the  United 
Company  it  was  manufacturing  every  single  lasting  machine  that  was 
being  put  out  in  the  United  States  except  the  Seaver  machine;  and  in  1900  we 
acquired  the  Seaver  Company"  (247  U.  S.  81).  At  the  time  of  the  govern- 
ment suit  only  one  other  concern — the  R.  H.  Long  Machinery  Company — ■ 
professed  to  put  out  lasting  machines.  Yet  this  company  had  put  out  only 
four,  and  it  was  by  no  means  in  a  position  to  supply  all  the  requisite  types  of 
lasting  machines.  That  being  the  case  it  could  not  become  a  competitor  of 
any  consequence,  since  all  of  the  United  Company  lasting  machine  leases 
contained  an  exclusive  use  clause,  which  required  the  shoe  manufacturer  to 
obtain  all  of  his  lasting  machinery  from  the  United  Company.  Brief  for  the 
United  States  (no.  207),  pp.  177-178. 

^  See  p.  476. 

^  Original  Petition  in  United  States  v.  United  Shoe  Machinery  Company, 
p.  12. 


176       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  stitcher  and  welter,  which  attach  the  upper  to  the  inner  sole 
and  the  outer  sole  to  the  welt.  To  those  fundamental  machines 
other  machines  are  tied.  A  man  can  have  a  stitcher  and  a  welter 
and  not  be  required  to  take  a  single  other  machine,  and  he  can 
acquire  by  purchase  a  great  nimiber  of  other  machines  without 
being  required  to  take  a  stitcher  or  a  welter.  But  if  he  takes  a 
stitcher  and  a  welter  and  also  wants  to  take  a  lasting  machine 
he  is  required  to  use  that  lasting  machine  only  on  shoes  which 
are  stitched  and  welted  on  the  company's  stitcher  and  welter."  ^ 
According  to  counsel  a  shoe  manufacturer  could  have  a  stitcher 
and  welter,  and  need  take  no  other  machine."  But  he  had  to 
have  a  lasting  machine,  and  if  he  took  one — as  he  must  if  he  is  to 
manufacture  shoes — he  was  required  in  effect  to  use  not  only  the 
company's  stitcher  and  welter,  but  a  nimiber  of  other  machines, 
none  of  which  might  be  used  except  in  connection  with  the 
company's  lasting  machines.  The  privilege,  therefore,  of  using 
the  company's  stitcher  and  welter  and  no  other  machine  was 
thus  a  hollow  one. 

It  is  important  to  note  that  through  these  tying  clauses  the 
period  of  patent  protection  has  in  effect  been  extended  beyond 
the  time  set  by  law.  A  machine  on  which  the  patent  has  ex- 
pired can  be  tied  to  an  essential  machine  on  which  the  patent 
has  not  expired.  Mr.  Charles  H.  Jones  testified  that  his  com- 
pany was  paying  at  least  $25,000  a  year  royalty  on  machines, 
the  important  patents  on  which  had  already  expired.^  It  would 
appear  that  so  long  as  the  tying  clauses  are  in  force,  the  time 
may  never  come  when  shoe  manufacturers  will  be  free  to  secure 
their  bottoming  machinery  where  they  choose.  In  other  words, 
potential  competition  may  hardly  be  said  to  exist  in  this  industry. 

The  attitude  of  the  shoe  manufacturers  generally  appears  to  be 
one  of  opposition  to  the  tying  clauses.  The  Shoe  Manufacturers* 
Alliance,  comprising  manufacturers  producing  about  40  per  cent 
of  all  the  shoes  produced  in  this  country,  adopted  resolutions  in 

^  Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  2166. 
^  The  lessee  of  a  welter  may  not  use  a  comi)cting  stitcher  and  vice  versa. 
Brief  for  the  United  States  (no.  207),  p.  182. 

^  Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  2271. 


THE  UNITED  SHOE  MACHINERY  COMl'ANY  177 

191 1  urging  the  removal  of  the  tying  clauses  and  the  restoration 
of  competitive  conditions  in  the  shoe  machinery  industry.^  The 
Shoe  Manufacturers'  Association  of  Brockton,  one  of  the  shoe 
centers  of  New  England,  passed  a  resolution  in  1911  that  the 
association  place  itself  on  record  as  being  in  favor  of  a  continu- 
ance of  the  lease  system  of  the  United  Company,  provided 
such  portions  of  the  leases  as  operated  to  exclude  the  use  of 
competitive  machines  were  abolished,  and  provided  the  penalty 
or  charges  for  returning  used  machinery  were  modified  or  wiped 
out.^  This  association  represented  at  least  10  per  cent  of 
the  shoe  manufacturers  of  the  country.  Mr.  Charles  H.  Jones,  a 
prominent  shoe  manufacturer  in  Boston,  testified  as  follows  be- 
fore a  Senate  investigating  committee : "  I  believe  I  am  well  within 
the  fact  when  I  say  there  are  not  a  dozen  men  in  the  United 
States  engaged  in  the  manufacture  of  shoes  who  do  not  believe 
this  tying  clause  should  be  stricken  out.  They  like  some  of  the 
features  of  the  leasing  system  very  much,  but  all  agree  that  these 
things  are  repugnant  to  common  sense  and  good  business  prac- 
tice." 3 

In  1907  the  state  of  Massachusetts  passed  a  bill  to  make  the 
tying  clauses  illegal.  The  act  provided  in  substance  that  no 
person,  firm,  or  corporation  should  make  it  a  condition  of  the  sale 
or  lease  of  any  tool,  appliance,  or  machinery,  that  the  purchaser 
or  lessee  thereof  should  not  buy,  lease,  or  use  machinery,  tools, 
appliances,  material  or  merchandise,  of  any  person,  firm,  or  cor- 
poration other  than  such  vendor  or  lessor;  but  this  provision 
should  not  impair  the  right,  if  any,  of  the  vendor  or  lessor  of  any 
tool,  appliance,  or  machinery  protected  by  a  lawful  patent  right 
vested  in  such  vendor  or  lessor  to  require  by  virtue  of  such  pat- 
ent right  the  vendee  or  lessee  to  purchase  or  lease  from  such  ven- 
dor or  lessor  such  component  parts  of  said  tool,  appliance,  or 
machinery,  as  the  vendee  or  lessee  might  thereafter  require  dur- 
ing the  continuance  of  such  patent  right:  Provided,  that  nothing 
in  the  act  should  be  construed  to  prohibit  the  appointment  of 
sales  agents  to  sell  or  lease  machinery,  etc.^ 

1  Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  2266. 

2  Ibid.,  p.  2121.  ^Ibid.,  p.  2263.  *Acts  of  1907,  ch.  469. 


178        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Thereupon  the  United  Company  attached  to  all  its  leases  a 
rider  providing  that  "any  and  all  agreements,  stipulations,  pro- 
visions, and  conditions  hereinbefore  printed  in  this  instrument 
which  are  in  violation  of  the  provisions  of  Chapter  469  of  the 
Acts  of  the  General  Court  of  Massachusetts  for  the  year  1907,  if 
there  are  any  such,  are  hereby  stricken  out  before  execution  and 
are  not  agreed  to  nor  made  a  part  of  this  contract,"  ^ 

The  Massachusetts  legislation  thus  seems  to  have  had  but 
little  effect.  The  right  reserved  to  the  United  Company  to  can- 
cel all  leases  apparently  deterred  the  shoe  manufacturers  from 
putting  to  the  test  their  undoubted  legal  rights;  for  a  manufac- 
turer who  attempted  to  use  in  part  only  the  essential  machinery 
of  the  United  Company  ran  the  risk  of  ruin. 

In  1914,  as  part  of  the  anti-trust  legislation  of  that  year,  the 
federal  government  enacted  a  similar  prohibition.  This  topic 
will  be  discussed  in  chapter  XV. 

The  United  Shoe  Machinery  Company  has  laid  a  great  deal 
of  emphasis  upon  the  excellence  of  its  machines  and  of  its  serv- 
ice; and  there  can  be  no  doubt  that  such  excellence  has  been 
a  great  asset.  Mr.  McElwain,  late  president  of  the  largest  shoe 
concern  in  the  country,  said  in  a  letter  (191 2) :  "We  believe  that 
the  United  Shoe  Machinery  Co.  is  in  many  respects  rendering 
eflScient  service  to  shoe  manufacturers.  .  .  .  We  have  sufficient 
confidence  in  the  strength  of  this  company  to  believe  that  it  will 
stand  in  the  forefront  of  shoe  machinery  makers,  even  with  the 
removal  of  the  restrictions,  which  have  been  mentioned  [the  tying 
clauses]."  ^  Its  high  efficiency  was  commented  upon  freely  also 
by  the  Circuit  Court  before  which  the  dissolution  suit  was  tried.^ 

Whether  the  existence  of  a  shoe  machinery  trust  promotes  in- 
vention, however,  is  a  disputed  question.  The  United  Company 
maintains  a  large  corps  of  inventors,  and,  according  to  counsel 
for  the  company,  has  made  distinct  progress  in  invention.  "  The 
United  Shoe  Machinery  Company  has  spent  all  the  way  from 
$250,000  to  $750,000  in  experiment  and  development  of  new 

'  Journal  of  Political  Economy,  21,  pp.  945-946. 

2  Report  of  the  Senate  Committee  on  Control  of  Coqwrations,  p.  2268. 

'  222  Fed.  Rep.  372. 


THE  UNITED  SHOE  MACHINERY  COMPANY  179 

machines  every  year  since  it  was  formed.  It  has  made  workable 
over  100  different  new  machines,  some  of  which  perform  opera- 
tions formerly  performed  by  hand  and  all  of  which  are  far  better 
than  those  formerly  in  use.  Taken  in  connection  with  reduction 
in  royalties,  shoe  manufacturers  by  their  use  effect  a  saving  of 
nearly  9  cents  in  the  cost  of  making  a  pair  of  Goodyear  welt 
shoes,  or  nearly  double  the  royalty  now  paid.  A  greater  number 
of  practical  patents  in  shoe  machinery  have  been  made  effective 
in  the  past  1 2  years  than  in  any  other  period  of  equal  length  since 
shoe-making  began."  ^ 

That  the  technical  progress  of  the  industry  has  been  promoted 
by  the  United  Company  is  denied  by  prominent  shoe  manufac- 
turers. A  group  of  them  instrumental  in  organizing  the  Shoe 
Manufacturers'  Alliance  made  the  following  statement:  "At 
present  [191 2]  practically  all  of  the  essential  machinery  used  in 
bottoming  shoes  in  this  country  is  owned  by  a  single  corporation, 
which  is  dominated  practically  by  one  man.  This  is  a  condition 
permitting  the  exercise  of  complete  and  arbitrary  control  of  our 
businesses.  It  is  contrary  to  the  very  spirit  of  liberty,  and  as 
such  humiliating  to  us  as  shoe  manufacturers.  It  also  necessarily 
tends  to  retard  and  to  restrict  improvements  in  shoe  machinery. 

"  That  it  does  so  restrict  development  will  be  clear  to  those  who 
compare  the  progress  of  shoe  machinery  during  the  last  1 2  years 
with  the  advances  made  from  year  to  year  prior  to  that  date. 
Shoe  manufacturing  in  America  is  to-day  efficient,  and  much  of 
that  efficiency  is  due  to  the  extraordinary  advances  in  shoe  ma- 
chinery made  prior  to  the  organization  of  the  Shoe  Machinery 
Trust.  Nearly  every  one  of  the  30  years  prior  to  1900  witnessed 
some  marked  advance  in  shoe  machinery.  That  was  a  period  of 
open  competition  in  the  production  of  shoe  machinery.  Those 
who  controlled  the  successful  inventions  reaped  rich  rewards. 
The  activities  of  inventors  and  mechanics  were  stimulated,  and 
the  results  were  revolutionary  in  character.  Wages  increased, 
but  the  unit  labor  cost  of  producing  shoes  was  being  continually 
and  substantially  lowered. 

"Since  1900  the  development  in  essential  shoe  machinery  has 
*  Roe,  Journal  of  Political  Economy,  22,  p.  55. 


l8o        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

not  been  marked  by  any  important  invention  materially  reduc- 
ing the  cost  or  improving  the  quality  of  work.  Such  new  in- 
ventions as  have  been  made  are  confined  to  details  of  minor 
consequence  as  compared  with  the  advances  made  prior  to  the 
formation  of  the  Shoe  Machinery  Trust.  This  check  upon  the 
development  of  essential  shoe  machinery  is  believed  to  be  a  nec- 
essary result  of  the  formation  of  the  combination.  It  has  re- 
moved the  stimulus  of  competition."  ^ 

Mr.  Charles  H.  Jones  testified  that  it  was  the  belief  of  men  in 
the  shoe  business  and  in  the  shoe  machinery  business  that  the 
inventors  of  the  United  Company  were  allowed  to  work  only 
along  very  narrow  lines,  and  that  they  were  not  encouraged  to 
develop  original  ideas.-  In  fact,  so  he  said,  "  it  is  directly  against 
the  interests  of  this  company,  in  its  machinery  investments,  to 
find  revolutionary  machines.  They  have  got  go,ooo  machines, 
they  claim,  in  the  factories  of  the  United  States.  These  ma- 
chines are  producing  them  an  enormous  revenue.  What  possible 
inducement  would  it  be  for  them  to  throw  out  one,  two,  or  three 
of  those  machines  and  put  in  something  very  much  better? 
They  could  not  get  any  more  royalty.  They  would  have  a  very 
large  machinery  cost,  but  there  would  be  no  additional  return."  ^ 

That  the  United  Shoe  Machinery  Company  possessed  no  mo- 
nopoly of  inventive  genius  is  proven  by  the  Plant  episode.^  Mr. 
Thomas  G.  Plant,  a  shoe  manufacturer  at  Roxbury,  Massachu- 
setts, succeeded  in  inventing  a  set  of  bottoming  machinery 
which,  to  say  the  least,  had  great  experimental  promise.  The 
business  of  the  shoe  machinery  trust,  protected  as  it  was  by 
patents,  bade  fair  to  be  interfered  with,  when  the  whole  outfit, 
including  Mr.  Plant's  shoe  factory,  was  purchased  (19  lo)  by  the 
United  Shoe  Machinery  Company  for  $6,000,000.'^ 

1  Report  of  the  Senate  Committee  on  Control  of  Corporations,  pp.  2266- 
2267. 

2  Ibid.,  p.  2264. 
'  Ibid.,  p.  21 17. 

*  This  episode  is  described  in  Brief  for  the  United  States  (no.  207),  pp.  105- 

133- 

*  $3,000,000  in  cash  and  the  balance  in  stock  of  the  United  Company  hav- 
ing a  par  value  of  $1,500,000,  but  a  market  value  of  $3,000,000.    247  U.  S.  49. 


THE  UNITED  SHOE  MACHINERY  COMPANY  i8i 

We  will  let  Mr.  Brandeis  (now  Justice  of  the  Supreme  Court) 
tell  the  story: 

"  He  [Mr.  Plant]  was  a  very  successful  shoe  manufacturer — a 
remarkably  successful  man.  His  concern  was  earning  five  or  six 
hundred  thousand  dollars  a  year.  His  business  had  been  built 
up  through  his  own  efforts  and  with  his  brother's  aid.  With  a 
few  about  him  he  displayed  admirable  business  ability,  govern- 
ing a  business  extending  throughout  the  country.  He  undertook 
a  task  which  was  large,  namely,  of  creating  a  competing  shoe- 
machinery  system,  and  it  involved  the  expenditure  of  several 
million  dollars — between  three  and  four  million  dollars.  Now, 
with  Mr.  Plant's  shoe  business  and  with  these  machines  which  he 
had  developed  into  a  successful  system — declared  by  some  of 
the  best  manufacturers  of  the  country  to  be  superior  to  the 
United's — he  was  in  a  position  where  he  was  entitled  practically 
to  any  reasonable  credit  he  might  ask.  The  amount  that  he  re- 
quired to  carry  him  along  was  about  $2,000,000.  He  had  prop- 
erty that  was  worth  four  or  five  million  dollars.  His  shoe  busi- 
ness was  one  of  the  leading  shoe  businesses  in  the  country,  and 
yet  after  he  had  completed  his  machinery  system;  after  he  had 
demonstrated  the  success  of  it  and  gotten  the  certificate  of  ap- 
proval from  some  of  the  best  manufacturers  of  the  country,  east 
and  west,  his  credit  was  cut  off  absolutely.  Men  who  were  dis- 
posed to  give  credit  after  a  few  days  withdrew." 

"That  was  not  acc-ident.  It  was  not  the  result  of  internal  de- 
liberation upon  the  question.  It  was  undoubtedly  the  result  of 
that  influence  exercised  directly  and  indirectly  by  the  powerful 
organization  to  which  he  was  opposed.  As  a  matter  of  fact  this 
shoe  machinery  corporation  is  a  financial  power  as  much  as  it  is 
an  industrial  power.  The  managers  of  the  shoe  machinery  cor- 
poration are  practically  the  controlling  influence  in  the  First  Na- 
tional Bank  of  Boston.  They  are  a  very  large  influence  in  our 
leading  trust  company,  and  have  important  influence  in  the  Han- 
over National  Bank  and  other  banks  of  New  York.  It  has  been 
the  steady  policy  of  the  United  Shoe  Machinery  Corporation  to 
keep  at  all  times  a  huge  cash  balance  which  was  deposited  in 
those  various  banks,  evidently  not  so  much  for  current  use  in  the 


1 82       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

business  as  for  the  financial  control  which  they  exercised  through 
being  large  depositors  in  important  banks  ....  I  have  very- 
good  evidence — absolutely  reliable  in  my  judgment — that  one  of 
the  men  who  refused  Mr.  Plant  credit,  thought  that  his  credit 
was  perfectly  good  and  was  willing  to  give  him  the  credit,  but  was 
not  willing  to  oppose  the  important  financial  interests  that  in- 
timated to  him  that  they  did  not  want  him  to  have  credit 

You  know  how  he  happened  to  sell  out  his  business  to  the  Shoe 
Machinery  Trust.  Mr.  Plant  was  driven  to  the  position  where 
the  next  day  he  had  to  meet  perhaps  half  a  million  dollars  of  obli- 
gations and  he  simply  could  not  get  any  money.  He  had  been 
driven  to  the  last  ditch.  He  had  been  trying  to  raise  some  money 
through  an  arrangement  with  western  manufacturers.  They 
were  in  Boston  for  that  purpose.  They  were  not  quite  ready  to 
agree  to  advance  the  large  simi  of  money  needed.  It  was  neces- 
sary to  have  about  a  million  dollars  to  meet  the  situation.  He  left 
these  western  manufacturers  at  about  8  o'clock.  Failure  to 
meet  his  obligations  stared  Mr.  Plant  in  the  face.  He  then  went 
to  the  office  of  the  counsel  of  the  Shoe  Machinery  Trust  to  see 
the  members  of  that  corporation,  and  between  8  that  evening  and 
5  o'clock  the  next  morning  the  transaction  was  completed  by 
which  this  wonderful  competitive  machinery  system  was  turned 
over  to  the  shoe  machinery  corporation.  The  officers  and  counsel 
were  in  conference  all  night  to  complete  the  transaction  which 
involved  something  like  $5,000,000,  enough  to  enable  Mr.  Plant 
to  pay  his  debts  and  to  remain  a  rich  man."  ^ 

Thus,  said  Mr.  Brandeis,  even  in  the  ably  managed  United 
Shoe  Machinery  Company  the  inefficiency  which  is  bred  of  mo- 
nopoly manifested  itself,^ 

The  charge  of  banking  pressure  has  been  denied  by  representa- 
tives of  the  company.  The  president  in  a  letter  to  the  Senate 
Committee  before  which  Mr.  Brandeis  told  his  story  wrote  that 
"the  United  Shoe  INIachinery  Co.,  or  anyone  connected  with  it, 
never  did  anything  to  injure  Mr.  Plant's  credit  at  the  bank  or  to 
in  any  way  affect  banks  in  regard  to  Mr.  Plant."  ^    Representa- 

1  Report  of  the  Senate  Committee  on  Control  of  Corporations^  pp.  1188- 
1190.  ^ibjd^  p_  jj5i,  *  Ibid.,  p.  i960. 


THE  UNITED  SHOE  MACHINERY  COMPANY  183 

tives  of  the  company  further  charged  that  Mr.  Plant's  inven- 
tions in  their  then  existing  form  could  not  have  been  utilized  to 
the  best  advantage  by  the  trade,  but  combined  with  the  inven- 
tions owned  by  the  United  Company  and  incorporated  in  its 
machines  they  would  advance  the  art  of  shoe-making  mate- 
rially.^ In  fact — so  they  charged — Mr.  Plant  had  no  desire  to 
supply  the  shoe  manufacturers  with  machines;  he  had  built  up 
his  line  of  machines  to  sell  to  the  United  Company.-  Whatever 
may  be  the  merits  of  this  controversy,  it  is  admitted  by  counsel 
for  the  company  that  the  improvements  made  by  Mr.  Plant 
were  worth  every  cent  that  they  cost  the  company;  ^  and  it 
would  appear  to  be  proven,  therefore,  that  the  United  Company, 
with  all  its  corps  of  inventors,  did  not  entirely  take  the  place  of 
independent  endeavor  in  promoting  the  technical  progress  of 
the  industry.  , 

The  profits  of  the  United  Shoe  Machinery  Company  come 
largely,  of  course,  from  the  royalties  on  the  use  of  the  leased  ma- 
chines. The  number  of  machines  on  lease  in  the  United  States 
on  March  i,  igii,  was  90,276.^  According  to  the  president  of  the 
company,  the  amounts  paid  per  pair  of  shoes  for  the  use  of  all 
the  principal  royalty  machines  furnished  by  the  company  for  the 
manufacture  of  the  different  classes  of  shoes,  when  accounts 
were  paid  within  thirty  days,  were  substantially  as  follows:  ^ 

Goodyear  welts,  men's  work $0 .  05694 

Goodyear  welts,  women's  work 04694 

Goodyear  turn  shoes,  women's  and  misses' 01972 

Goodyear  turn  shoes,  children's 00500 

McKay  shoes,  men's  and  women's 01746 

McKay  sewed  shoes,  children's 01391 

1  Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  1959. 
See  on  this  point  247  U.  S  50-51,  87-89. 

-  Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  2162. 
Judge  Dodge  of  the  Circuit  Court  declared  this  charge  to  be  true.  222 
Fed.  Rep.  376. 

'  Report  of  the  Senate  Committee  on  Control  of  Corporations, 
p.  2162. 

■♦Annual    Report    of    the    United    Shoe    Machinery    Company,    191 1, 

P-  5- 

^  Ibid.,  p.  7. 


1 84       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

From  these  royalties  there  should  be  deducted  six-tenths  of 
a  cent  per  pair  for  men's  Goodyear  welts,  forty-five  one- 
hundredths  of  a  cent  per  pair  for  women's  Goodyear  welts,  and 
seventy-five  one-hundredths  of  a  cent  per  pair  for  women's  and 
children's  Goodyear  turns;  the  foregoing  sums  to  be  invested  in 
stock  of  the  company,  and  given  to  lessees.^  This  profit-sharing 
plan,  presumably  designed  to  secure  the  adhesion  of  the  shoe 
manufacturers,  was  subsequently  abandoned  (191 2)  because — ■ 
so  it  was  alleged — of  the  government  dissolution  suit  filed  in 
December,  191 1. 

The  foregoing  royalties,  according  to  the  president,  covered 
substantially  everything  that  the  company  received  for  the  use 
of  its  principal  machines  from  those  manufacturers  who  used  its 
machines  in  making  Goodyear  welt,  Goodyear  turn  or  McKay 
sewed  shoes.-  In  return  for  the  royalties  and  rentals  which  it 
received,  the  company  assumed  the  cost  of  invention,  develop- 
ment, manufacture,  and  depreciation  of  machines;  the  care  of 
the  machines  through  its  force  of  over  500  experts,  who  devoted 
their  entire  time  to  the  service;  the  purchase  of  patents;  and  the 
cost  of  administration.  According  to  the  president,  the  only 
important  item  of  cost  in  the  manufacture  of  shoes  which  did  not 
increase  during  the  first  twelve  years  after  the  company  was 
formed  was  the  item  of  machinery. 

The  profits  of  the  company  have  been  very  liberal.  Up  to 
1905,  6  per  cent  dividends  were  regularly  paid  on  the  preferred 
stock  and  8  per  cent  on  the  common  stock.  In  that  year  a  re- 
organization was  effected.  For  reasons  not  clear,  a  new  com- 
pany— the  United  Shoe  Machinery  Corporation — was  organized 
in  May  to  serve  as  a  holding  company.  The  Corporation  offered 
to  exchange  its  preferred  stock  at  par  plus  i  1/2  per  cent  cash 
for  the  preferred  stock  of  the  United  Shoe  Machinery  Company, 
and  150  per  cent  of  its  common  stock  plus  3  per  cent  cash  for 
the  common  stock  of  the  Company.     This  offer  was  generally 

^Annual  Report  of  the  United  Shoe  INIachinery  Company,  1911,  p.  7. 

^  A  number  of  auxiliary  machines  could  be  used  by  the  shoe  manufacturer 
without  payment  of  royalty,  but  upon  payment  of  a  nominal  annual  rental 
to  cover  the  depreciation  of  the  machines. 


THE  UNITED  SHOE  MACHINERY  COMPANY  185 

accepted,  and  the  Corporation  by  1915  held  98  1/2  per  cent  of 
all  the  stock  of  the  Company}  Upon  the  preferred  stock  of  the' 
Corporation  6  per  cent  has  regularly  been  paid,  and  upon  the 
common  stock,  including  the  50  per  cent  addition,  8  per  cent 
as  before.  In  addition,  the  common  stockholders  have  received 
numerous  stock  and  extra  cash  dividends.  In  1907  they  re- 
ceived a  25  per  cent  stock  dividend;  in  1909  a  10  per  cent  stock 
dividend,  and  2  per  cent  extra  in  cash;  and  in  1910a  10  per  cent 
stock  dividend,  and  4  per  cent  extra  in  cash.  The  total  in  1910 
was  thus  12  per  cent  in  cash  plus  10  per  cent  in  stock.  On  the 
original  common  stock,  which  may  have  been  heavily  watered, 
this  amounted  to  quite  a  high  figure.  To  be  exact,  it  amounted 
to  S18.15  cash  on  every  $100  of  common  stock  issued  by  the 
United  Shoe  Machinery  in  1899,  and  counting  the  extra  dividend 
in  1910  to  $22.15  ^^  cash.  These  are  dividends  only;  the  profits 
were  much  greater,  as  is  evident  from  the  large  surplus  built  up. 
For  example,  during  the  three  years  ending  March  i,  191 2,  the 
net  earnings  aggregated  $17,268,000;  the  dividends  $9,344,000; 
and  the  surplus  $7,924,000. 

'  Moody's  Manual,  Industrial  and  Public  Utility  Section,  1916,  p.  3690. 


CHAPTER  IX 

THE  UNITED  STATES  STEEL  CORPORATION  ^ 

With  the  early  history  of  the  iron  and  steel  industry  we 
are  not  concerned.  'Even  as  late  as  1890  there  were  practi- 
cally no  combinations  of  the  modern  type  in  the  steel  industry. 
To  be  sure,  the  Illinois  Steel  Company,  for  example,  had  been 
organized  in  1889  as  a  consolidation  of  three  erstwhile  com- 
petitive concerns,  yet  such  combinations  were  unusual.  Dur- 
ing the  early  nineties,  however,  the  situation  changed.  The 
individual  plants  not  only  continued  to  expand  in  size,  as  during 
the  eighties,  but  they  became  united  in  combinations.  In  1891 
the  Lackawanna  Iron  and  Steel  Company  was  incorporated, 
a  consolidation  of  the  Lackawanna  Iron  and  Coal  Company  and 
the  Scranton  Steel  Company.  In  1892  the  Colorado  Fuel  and 
Iron  Company  was  organized  to  unite  the  Colorado  Fuel  Com- 

1  On  the  United  States  Steel  Corporation  see:  Report  of  the  Commissioner 
of  Corporations  on  the  Steel  Industry,  part  I,  Organization,  Investment, 
Profits,  and  Position  of  United  States  Steel  Corporation  (July  i,  191 1), 
part  II,  Cost  of  Production,  Preliminary  Report  (January  22,  191 2),  and 
part  III,  Cost  of  Production,  Full  Report  (May  6,  1913);  Brief  for  the  United 
States,  in  two  parts,  in  United  States  v.  United  States  Steel  Corporation 
(no.  6214);  Brief  for  the  United  States,  in  two  volumes,  in  United  States  v. 
United  States  Steel  Corporation  (no.  481);  Brief  for  the  United  States  Steel 
Corporation  (no.  481);  223  Fed.  Rep.  55-179;  251  U.  S.  417-466;  House 
Report  no.  11 27,  62nd  Cong.,  2nd  sess.  (Stanley  Committee  Report);  Report 
of  the  Senate  Committee  on  Interstate  Commerce  on  the  Control  of  Corpora- 
tions, 1913;  Industrial  Commission,  vol.  I,  PP.849-103Q,  and  vol.  XIII,  pp. 
448-516;  Berglund,  The  United  States  Steel  Corporation;  Wilgus,  A  Study 
of  the  United  States  Steel  Corporation  in  its  Industrial  and  Legal  Aspects; 
Willoughby,  Quarterly  Journal  of  Economics,  16,  pp.  94-115;  Meade,  Trust 
Finance,  ch.  11;  McVey,  Yale  Review,  7,  pp.  302-318,  and  8,  pp.  156-172; 
Walker,  Quarterly  Journal  of  Economics,  20,  pp.  353-398;  Taussig,  Some 
Aspects  of  the  Tariff  Question,  chs.  9-10,  12-13;  Dunbar,  The  Tin- Plate 
Industry. 

iik5 


THE  UNITED  STATES  STEEL  CORPORATION  187 

pany  and  the  Colorado  Coal  and  Iron  Company.^  In  the  same 
year  the  Carnegie  Steel  Company  (Ltd.),  a  partnership,  was 
formed  with  a  capital  stock  of  $25,000,000.  This  concern,  with 
all  its  plants  concentrated  at  Pittsburg,  was  then  the  largest  in 
the  industry.  Yet  it  could  hardly  be  considered  a  real  combina- 
tion, since  it  represented  for  the  most  part  simply  a  more  binding 
union  of  interests  long  aflfiliated.  Other  important  concerns  in 
the  iron  and  steel  industry  in  the  early  nineties  were  Jones  and 
Laughlin;  the  Pennsylvania  Steel  Company,  with  its  subsidiary, 
the  Maryland  Steel  Company;  the  Tennessee  Coal,  Iron  and 
Railroad  Company;  the  Cambria  Iron  Company;  and  the 
Bethlehem  Iron  Company. 

Most  of  the  above  enumerated  concerns  were  engaged  chiefly 
in  the  production  of  semi-finished  steel  (billets,  blooms  and 
slabs),  and  of  the  simpler  and  heavier  forms  of  rolled  steel  prod- 
ucts, such  as  rails,  plates,  and  beams.  The  manufacture  of  the 
heavier  steel  products  was  concentrated  to  a  considerable  ex- 
tent, even  in  the  early  nineties,  in  the  hands  of  a  comparatively 
few  producers.  Thus  the  Carnegie  Steel  Company,  the  Illinois 
Steel  Company,  the  Jones  and  Laughlin  interests,  the  Lacka- 
wanna Iron  and  Steel  Company,  the  Pennsylvania  Steel  Com- 
pany, the  Cambria  Iron  Company,  and  the  Bethlehem  Iron 
Company  together  turned  out  nearly  half  of  the  steel  ingots 
produced  in  this  country  (steel  ingots  are  the  raw  material  from 
which  nearly  all  steel  products  are  made,  but  they  are  generally 
put  through  a  further  process  of  manufacture  before  being  sold). 
But  these  companies  were  entirely  separate  with  respect  to 
ownership,  and  in  spite  of  the  existence  of  pools  of  one  kind  or 
another  were  quite  active  competitors.^ 

Save  these  companies  producing  the  heavier  steel  products, 
there  were  comparatively  few  concerns  of  any  considerable  size 
in  the  iron  and  steel  industry  in  the  early  nineties,  and  very  few 

'  The  Colorado  Fuel  and  Iron  Company  at  this  time,  however,  had  a 
greater  interest  in  the  coal  trade  than  in  the  iron  and  steel  business. 

2  Report  of  the  Commissioner  of  Corporations  on  the  Steel  Industry, 
part  I,  p.  65.  Referred  to  hereafter  as  Report  of  the  Commissioner  of  Cor- 
Dorations. 


1 88       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

combinations.  The  Consolidated  Steel  and  Wire  Company,  to 
be  sure,  was  an  important  combination  in  the  wire  and  nail 
business  (1892),  yet  for  the  most  part  the  manufacture  of  such 
products  as  nails,  tin  plate,  and  sheets  was  carried  on  by  numer- 
ous concerns,  many  of  them  producing  on  a  small  scale.  Com- 
petition in  these  lines  was  quite  vigorous,  except  when  restrained 
on  occasion  by  pooling  agreements. 

The  situation  was  the  same  in  the  iron  mining  industry. 
While  there  were  a  few  large  concerns,  such  as  the  Minnesota 
Iron  Company  and  the  Lake  Superior  Consolidated  Iron  Mines, 
organized  in  1882  and  1893,  respectively,  yet  in  general  the 
ownership  of  the  iron  ore  mines  was  widely  scattered;  and 
though  there  were  iron  ore  pools,  competition  was  the  character- 
istic feature  of  the  industry. 

In  another  respect  the  steel  industry  of  the  early  nineties 
presented  a  marked  contrast  with  the  industry  of  to-day.  This 
was  in  the  comparative  absence  of  integration, — the  practice  of 
uniting  under  one  control  the  successive  stages  in  the  manufac- 
ture of  the  finished  products.  There  was  some  integration,  to  be 
sure.  The  Carnegie  Steel  Company,  for  example,  through  the 
Frick  Coke  Company  held  large  deposits  of  coking  coal,  and  by 
the  purchase  in  1892  of  a  half-interest  in  the  Oliver  Iron  Mining 
Company  had  provided  itself  with  a  supply  of  iron  ore.  But  the 
production  of  the  Oliver  concern  was  quite  inadequate  to  the 
needs  of  the  Carnegie  Company,  and,  moreover,  Mr.  Carnegie 
was  understood  to  be  opposed  to  the  ownership  of  ore  mines.  ^ 
The  business  of  mining  iron  ore,  like  the  production  of  crude 
oil,  was  largely  speculative;  and  Mr.  Carnegie,  like  Mr.  Rocke- 
feller, was  wiUing  that  the  risks  be  borne  by  those  more  specu- 
latively inclined.  Other  companies  had  integrated  their  business 
slightly,  yet  generally  speaking  it  was  true  that  the  manufac- 
turers of  finished  products  bought  the  semi-finished  steel  which 
constituted  their  raw  material;  the  manufacturers  of  steel  in 
turn  bought  their  pig  iron;  and  comparatively  few  iron  and  steel 
manufacturers  possessed  large  iron  ore  deposits  or  iron  ore 
railroads.  The  separate  stages  in  the  process  of  production 
*  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  68. 


THE  UNITED  STATES  STEEL.  CORPORATION 


189 


\vere  not  at  that  time  united  under  one  management  as  at 
present. 

From  what  has  been  said  it  is  apparent  that  the  leading 
characteristic  of  the  iron  and  steel  industry  during  the  early  and 
middle  nineties  was  its  competitive  character.  It  is  true  that 
agreements  were  quite  common;  indeed,  there  was  hardly  any 
branch  of  the  iron  and  steel  industry  that  was  free  from  them.  Yet 
the  pools  generally  maintained  but  a  precarious  existence,  and  this 
was  especially  true  of  the  less  formal  "gentlemen's  agreements." 

In  the  latter  part  of  the  nineties,  however,  the  situation 
underwent  a  marked  change.  In  1S98  the  combination  move- 
ment struck  the  iron  and  steel  industry,  and  by  1900  a  large 
number  of  combinations  had  been  formed.  Some  idea  as  to 
the  extent  of  this  movement  is  given  by  the  following  table, 
which  shows  the  leading  iron  and  steel  combinations  created 
during  1898  to  1900,  with  their  authorized  capitalization.^ 

Leading  Combinations  in  the  Iron  and  Steel  Industry,  1898-1900 
A.  Combinations  later  united  in  the  United  States  Steel  Corporation 


Name  aiid  year  of  organization 


Capitalization 


American  Steel  and  Wire  Co.  of  Illinois 

Federal  Steel  Co 

American  Tin  Plate  Co 


American  Steel  and  Wire  Co.  of  New  Jersey 

American  Steel  Hoop  Co 

National  Steel  Co 

National  Tube  Co 

1900 

American  Bridge  Co 

American  Sheet  Steel  Co 

Carnegie  Co.  of  New  Jersey 

Shelby  Steel  Tube  Co 


24: 
230, 

50 
90 

33 
61 
80 

70 

54: 

345 


,000,000 
,217,179 
,273,000 

1130,656 
,000,000 
,561,000 
,000,000 

,156,000 
,000,000 
,081,813 
,000,000 


Total $1,053,419,648 


1  Report  of  the  Commissioner  of  Corporations,  part  I,  pp.  80-81. 

2  This  company  was  merged  in  1899  into  the  American  Steel  and  Wire 
Co.  of  New  Jersey. 


I90       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 


B.  Combinations  not  subsequently  united  in  the  United  States  Steel 
Corporation 


Name  and  year  of  organization 


Capitalization 


1898 

American  Car  and  Foundry  Co 

American  Iron  and  Steel  Manufacturing  Co.  .  . 

Empire  Steel  and  Iron  Co 

National  Enameling  and  Stamping  Co 

Pressed  Steel  Car  Co 

Republic  Iron  and  Steel  Co 

Sloss-Sheffield  Steel  and  Iron  Co 

United  States  Cast-Iron  Pipe  and  Foundry  Co . 
Virginia  Iron,  Coal  and  Coke  Co 

1900 
Crucible  Steel  Co.  of  America 


$  60, 
20, 
10, 

25 

55 

23: 

30 

20 


000,000 
,000,000 
,000,000 
,600,000 
,coo,ooo 
,000,000 

,835,000 

,000,000 
,000,000 


50,000,000 


Total. 


524,435,000 


In  addition  to  these  combinations  there  were  a  number  of 
others  in  the  machinery  trade  or  similar  branches  of  the  industry. 
Among  them  were  the  American  Bicycle  Company,  capitalized 
at  $30,000,000;  the  International  Steam  Pump  Company 
($27,500,000);  the  United  Shoe  Machinery  Company  ($25,- 
000,000);  the  Otis  Elevator  Company  ($11,000,000);  and  the 
American  Radiator  Company  ($10,000,000). 

The  first  table  shows  the  companies  which  subsequently 
united  to  form  the  United  States  Steel  Corporation.  A  brief 
description  of  these  companies  will  facilitate  an  understanding 
of  the  subsequent  course  of  events. 

Carnegie  Company  of  New  Jersey.  The  leading  concern 
in  the  iron  and  steel  industry,  without  a  doubt,  was  the  Carnegie 
Company  of  New  Jersey.  This  company  was  organized  in 
March,  1900,  being  simply  a  reorganization  of  the  Carnegie 
interests  and  of  the  H.  C.  Frick  Coke  Company  (owning  exten- 
sive coking  coal  properties  in  the  Connellsville  district  of  Penn- 
sylvania). It  had  an  authorized  capitalization  of  $320,000,000, 
half  stock  and  half  bonds.  ^    All  of  its  manufacturing  properties 

'  Not  counting  $25,081,813  of  underlying  indebtedness  represented  by 
bonds. 


THE  UNITED  STATES  STEEL  CORPORATION  191 

were  concentrated  in  the  vicinity  of  Pittsburg,  thus  giving 
compactness  to  its  organization.  The  Carnegie  Company  also 
derived  strength  from  the  fact  that  its  size  had  been  attained 
largely  through  internal  expansion,  rather  than  through  the 
acquisition  of  competitors,  the  purchase  of  the  Duquesne  works 
(1890)  being  the  most  important  exception.  The  company 
was  noted  for  its  efficiency,  its  financial  power,  and  its  conserva- 
tive management.  It  had  built  up  its  property  chiefly  out 
of  earnings;  its  securities  were  not  on  the  stock  market;  and  its 
owners  were  actively  engaged  in  the  business.  Among  its  more 
important  subsidiary  and  allied  concerns  were  the  Oliver  Iron 
Mining  Company,  the  ore  deposits  of  which,  together  with  those 
secured  by  the  lease  of  the  properties  of  the  Lake  Superior 
ConsoUdated  Iron  Mines,  assured  the  Carnegie  Company  an 
ample  supply  of  good  ore  for  a  long  time;  the  Pittsburg,  Bessemer 
and  Lake  Erie  Railroad,  running  from  the  Great  Lakes  to  Pitts- 
burg, and  used  mainly  for  the  transportation  of  iron  ore;  the 
Union  Railroad  Company,  operating  an  important  belt  line  in 
the  Pittsburg  district;  and  various  gas,  water,  and  dock  com- 
panies. 

The  chief  business  of  the  Carnegie  Company  was  the  manu- 
facture of  semi-finished  steel  for  the  trade,  and  of  hea\y  steel 
products,  such  as  rails,  plates,  structural  steel,  bars,  skelp,  and 
bridge  material.  Its  leading  position  is  indicated  in  the  fact  that 
in  1900  it  produced  some  18  per  cent  of  all  the  ingots  produced  in 
the  country,  its  nearest  competitor  producing  only  about  15  per 
cent.^  The  Carnegie  Company  did  not  make  such  finished 
products  as  wire,  nails,  tubes,  tin  plate,  and  sheet  steel ;  it  merely 
supplied  the  manufacturers  of  these  finished  products  with 
the  necessary  crude  steel.  But  it  was,  nevertheless,  in  a  position 
to  turn  out  these  finished  products  itself  on  comparatively  short 
notice,  should  its  customers  decide  to  produce  their  own  crude 
steel, — a  circimistance  that  later  proved  to  be  one  of  the  unset- 
tling factors  leading  to  the  formation  of  the  United  States 
Steel  Corporation. 

The  Federal  Steel  Company.  The  largest  competitor  of 
1  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  87. 


192       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  Carnegie  Company  was  the  Federal  Steel  Company,  or- 
ganized in  September,  1898.  The  Federal  Steel  Company  was  a 
consoUdation  of  the  Illinois  Steel  Company,  with  several  steel 
plants  in  or  near  Chicago,  and  one  at  Milwaukee;  the  Lorain 
Steel  Company,  with  a  plant  at  Lorain,  Ohio;  the  Johnson 
Company,  with  a  plant  at  Johnstown,  Pennsylvania;  and  the 
Minnesota  Iron  Company,  which  not  only  owned  large  iron  ore 
deposits,  but  also  an  iron  ore  railroad  from  the  mines  to  the  Lakes 
(the  Duluth  and  Iron  Range  Railroad),  and  a  fleet  of  lake 
vessels  by  which  the  ore  was  carried  from  the  railroad  terminus  to 
the  lower  lake  ports.  The  Illinois  Steel  Company  controlled  the 
Chicago,  Lake  Shore  and  Eastern  Railway,  connecting  its  vari- 
ous plants  in  the  vicinity  of  Chicago;  and  the  Federal  Steel 
Company  itself  acquired  the  stock  of  the  Elgin,  Joliet  and 
Eastern  Railway,  a  line  connecting  with  nearly  every  railroad 
entering  Chicago.  The  Federal  Steel  Company  was  thus  well 
integrated;  in  fact,  the  chief  purpose  in  its  formation  seems  to 
have  been  not  so  much  the  suppression  of  competition  as  the 
creation  of  an  organization  that  would  be  independently 
situated,  not  only  with  respect  to  its  manufacturing  plants,  but 
also  with  respect  to  its  ore,  fuel,  and  means  of  transportation. 

The  Federal  Steel  Company,  like  the  Carnegie  Company, 
produced  chiefly  billets,  steel  rails,  plates,  structural  shapes, 
wire  rods,  and  semi-finished  steel  for  the  trade,  many  of  its 
largest  customers  being  themselves  steel  manufacturers.  At 
the  time  of  its  organization  in  1898  it  produced  about  15  per  cent 
of  the  country's  output  of  ingots,  somewhat  less  therefore  than 
the  output  of  the  Carnegie  Company.^  The  Federal  Steel  Com- 
pany was  generally  rated  as  a  Morgan  property. 

The  National  Steel  Company.  Next  in  importance  after  the 
Carnegie  Company  and  the  Federal  Steel  Company  was  the 
National  Steel  Company,  organized  in  February,  1899.  The 
National  Steel  Company  was  a  consolidation  of  a  number  of 
steel  concerns,  located  mainly  in  Ohio,  and  producing  in  1899 
about  12  per  cent  of  the  total  output  of  steel  ingots."     It  pro- 

'  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  88. 
2  Ibid.,  p.  89. 


THE  UNITED  STATES  STEEL  CORPORATION  193- 

duced  chiefly  semi-finished  steel,  i.  e.,  billets,  sheet  bars,  and 
tin  plate  bars,  rather  than  the  finished  products.  It  had  an 
excellent  market  for  its  crude  steel  through  its  close  affiliation 
with  the  American  Tin  Plate  Company,  the  American  Steel 
Hoop  Company,  and  the  American  Sheet  Steel  Company,  all 
promoted  by  Judge  W.  H.  Moore  (the  organizer  of  the  National 
Steel  Company),  and  all  obtaining  their  raw  material  largely 
from  it.  The  National  Steel  Company  carried  integration  almost 
as  far  as  the  Carnegie  Company  and  the  Federal  Steel  Company, 
but  differed  from  them  in  being  also  a  combination  of  formerly 
competitive  concerns. 

The  American  Tin  Plate  Company — the  tin  plate  trust. 
This  company,  organized  in  December,  1898,  illustrates  a  group 
of  combinations  formed,  not  to  integrate  more  fully  the  business 
of  production  (and  thus  to  achieve  a  more  strategic  position), 
but  to  restrain  or  exclude  competition.  It  brought  together 
39  plants,  controlling  279  mills,  which  represented  nearly  every 
concern  in  the  country  making  tin  plate.  ^  It  effected,  therefore, 
a  tin  plate  trust.  Having  done  so,  it  attempted  to  strengthen  its 
position  by  entering  into  exclusive  contracts  with  the  principal 
manufacturers  of  rolls  and  machinery  used  in  the  manufacture 
of  tin  plate,  and  thus  to  oppose  an  effective  obstacle  to  the 
construction  of  competing  mills.-  While  this  scheme  was  not 
altogether  successful  (the  contracts  were  cancelled  in  1902  at  the 
insistence  of  the  Steel  Corporation),  the  company  did  succeed  in 
maintaining  for  several  years  a  monopolistic  position  in  its 
branch  of  the  steel  industry. 

The  American  Steel  and  Wire  Company  of  New  Jersey — the 
wire  trust.  This  company  represented  another  attempt  to 
restrain  competition  and  to  make  large  promoters'  profits.  The 
dissolution  of  the  wire  nail  pool  toward  the  close  of  1896  had 
been  followed  by  marked  reductions  in  prices,  and  this  led  to  the 

*  Brief  for  the  United  States  (no.  481),  vol.  II,  p.  170.  The  United  State? 
Steel  Corporation  admitted  that  the  American  Tin  Plate  Company  acquired 
control  of  concerns  producing  90  per  cent  of  the  country's  output  of  tin  plate. 
Brief  for  the  Steel  Corporation  (no.  481),  p.  77. 

2  Brief  for  the  United  States  (no.  4&1),  vol.  II,  p.  192. 


194       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

organization  in  March,  1898,  of  a  combination, — the  American 
Steel  and  Wire  Company  of  IlHnois.  The  next  year  (January) 
the  combination  united  with  most  of  the  remaining  wire  con- 
cerns to  form  the  American  Steel  and  Wire  Company  of  New 
Jersey.^  This  company  produced  mainly  wire  nails,  plain  wire, 
barbed  wire,  and  wire  fencing;  and  according  to  the  brief  for 
the  government  in  its  suit  against  the  United  States  Steel  Cor- 
poration it  secured  an  almost  complete  monopoly  of  barbed  wire 
and  woven  wire,  and  controlled  about  four-fifths  of  the  nails  and 
the  wire  fencing  produced  in  the  United  States."  The  American 
Steel  and  Wire  Company  was  well  integrated,  possessing,  either 
at  its  organization  or  shortly  thereafter,  large  ore  deposits,  a 
big  reserve  of  coking  coal,  a  large  fleet  of  Lake  vessels,  and 
facilities  for  producing  a  limited  amount  of  pig  iron  and  crude 
steel. 

The  National  Tube  Company — the  tube  trust.  The  National 
Tube  Company  was  incorporated  in  June,  1899,  to  monopolize 
the  tubing  industry,  and  incidentally  to  enable  its  promoters  to 
make  a  profit  through  its  organization  (one-quarter  of  its  $80,- 
000,000  stock  issue  was  given  to  the  promoters).  Its  principal 
product  was  iron  and  steel  wTought  tubing,  and  the  company 
stated  in  1900  that  its  yearly  capacity  was  1,000,000  tons,  or 
90  per  cent  of  the  total  capacity  of  the  country.^  While  this  may 
have  been  an  exaggeration  of  the  extent  of  its  control,  neverthe- 
less the  company  did  produce  nearly  three-fourths  of  the  coun- 
try's output  of  wrought  tubing.^  The  National  Tube  Company, 
though  rated  as  a  Morgan  concern,  was  largely  dependent,  be- 
cause of  the  location  of  its  plants,  on  the  Carnegie  Company  for 
the  semi-finished  steel  that  constituted  its  raw  material.  Subse- 
quently it  proposed  to  produce  itself  most  of  its  raw  material, 
with  consequences  soon  to  be  described. 

The  American  Steel  Hoop  Company.     This  company  was 

*  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  92. 
^  Brief  for  the  United  States  (no.  6214),  part  I,  p.  50. 

'  Ibid.,  (no.  481),  vol.  II,  p.  222. 

*  See  Report  of  the  Commissioner  of  Coqjorations,  part  I,  p.  92;  Brief 
for  the  United  States  (no.  6214),  part  I,  p.  53;  and  223  Fed.  Rep.  167. 


THE  UNITED  STATES  STEEL  CORPORATION  195, 

formed  in  April,  1899.  It  united  nine  concerns  producing 
mainly  iron  and  steel  bars,  hoops  and  bands,  cotton  ties,  and 
iron  skelp.  It  was  primarily  a  combination  of  erstwhile  competi- 
tive concerns,  and,  according  to  the  Commissioner  of  Corpora- 
tions, a  desire  to  limit  competition  and  afford  a  large  profit  to  the 
promoters  was  undoubtedly  the  ruling  motive  in  its  organization.^ 
The  promoters  received  for  their  services  $5,000,000  of  the 
$33,000,000  stock  issued  by  the  company,  or  over  15  per  cent  of 
its  total  capitalization." 

The  American  Sheet  Steel  Company — the  sheet  steel  trust. 
This  company  was  organized  in  March,  1900,  to  consolidate  the 
properties  of  the  principal  manufacturers  of  sheet  steel.  Like 
the  American  Tin  Plate  Company  it  was  formed  to  unite  com- 
peting concerns;  and  it  secured  control  upon  its  organization  of 
about  70  per  cent  of  the  country's  capacity  of  sheet  steel,  the 
only  important  product  made  by  it.^ 

The  American  Bridge  Company.  This  company,  like  most  of 
those  already  described,  was  organized  (April,  1900),  not  to 
secure  the  advantages  of  integration,  but  the  profits  arising  from 
a  curbing  of  competition.''  Its  main  business  was  the  erection  of 
bridges  and  of  steel  construction  for  buildings,  and  it  was  entirely 
dependent  on  the  large  steel  manufacturers  for  its  raw  material. 
The  American  Bridge  Company,  like  the  Federal  Steel  Company 
and  the  National  Tube  Company,  had  close  affiliations  with  the 
firm  of  J.  P.  Morgan  and  Company. 

The  Shelby  Steel  Tube  Company — the  seamless  tube  trust. 
This  company,  incorporated  in  February,  1900,  combined  practi- 
cally all  the  concerns  in  the  country  manufacturing  seamless 
tubing.^  It  claimed  90  per  cent  of  the  country's  output,  and 
there  is  no  doubt  that  it  did  have  a  substantial  monopoly  of  its 
special  product  until  its  field  was  invaded  by  the  National  Tube 
Company.     The  motive  in  its  organization  was  the  establish- 

1  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  91. 

2  Cf.  p.  287. 

*  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  91. 
4  Ibid.,p.  93. 
6  Ibid. 


I9ff       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

ment  of   a   trust;    the   element  of   integration   was   distinctly 
lacking. 

The  Lake  Superior  Consolidated  Iron  Mines.  The  combina- 
tions and  trusts  just  described  were  all  organized  between  1898 
and  1900,  and  each  of  them  became  a  part  of  the  United  States 
Steel  Corporation.  One  other  concern,  organized  somewhat 
earUer,  deserves  mention.  The  Lake  Superior  Consolidated 
Iron  Mines,  largely  owned  by  Standard  Oil  interests,  was  or- 
ganized in  1893.  It  manufactured  no  iron  or  steel;  it  was  simply 
an  ore  producer  and  a  transportation  company.  It  had  vast 
reserves  of  iron  ore,  and  it  owned  an  important  iron  ore  rail- 
road,— the  Duluth,  Missabe  and  Northern.  Affiliated  with  it 
was  the  Bessemer  Steamship  Company,  the  largest  owner  of  ore 
vessels  on  the  Great  Lakes.  The  Lake  Superior  Consolidated 
Iron  Mines,  both  because  of  its  property  and  its  financial  back- 
ers, was  a  very  important  concern,  and  its  acquisition  by  the 
United  States  Steel  Corporation  in  1901  greatly  strengthened 
the  latter's  position. 

What  is  the  explanation  of  this  remarkable  movement  to- 
ward combination  in  the  iron  and  steel  industry?  The  advan- 
tages which  these  combinations  might  have  expected  to  gain 
were  three-fold:  (i)  the  restriction  of  competition;  (2)  a 
greater  degree  of  integration;  (3)  stock  market  profits  for  the 
promoters. 

The  large  profits  that  the  manufacturers  hoped  to  gain  were 
realized.  Aided  by  the  favorable  industrial  situation,  these 
combinations  and  trusts  were  able  to  put  prices  up  to  very  high 
figures.  The  price  of  Bessemer  pig  iron,  which  had  averaged 
$10.32  per  gross  ton  in  1898,  went  up  to  $18.88  per  ton  in  1899, 
and  to  $24.72  in  March,  1900.  The  price  of  steel  billets  had  been 
$15.18  per  gross  ton  in  1898;  it  rose  to  $29.81  per  ton  in  1899,  and 
to  $33.00  in  March,  1900.  The  price  of  steel  rails  averaged 
$17.63  per  gross  ton  in  1898,  $28.13  in  1899,  and  $35.00  in  March, 
1900.  The  price  of  tin  plate  averaged  $64.08  per  gross  ton  in 
1898;  the  next  year  it  went  to  $95.48.  Prior  to  the  formation 
of  the  tube  trust  the  price  of  tubes  had  been  $30.00  per  ton. 
During  1899  (the  year  of  its  formation)  the  price  rose  to  $67  per 


THE  UNITED  STATES  STEEL  CORPORATION 


197 


gross  ton,  and  early  in  1900  reached  its  maximum  at  $89.^ 
Further  details  may  be  had  by  consulting  the  table.-  It  is  not 
meant  to  imply,  of  course,  that  all  of  these  price  advances 
were  the  result  of  the  formation  of  combinations  and  trusts; 
but  it  is  safe  to  say  that  they  took  full  advantage  of  the  favor- 
able industrial  situation.^ 

The  desire  to  restrict  or  eliminate  competition  was,  according 
to  the  Commissioner  of  Corporations,  undoubtedly  the  main 
reason  for  the  formation  of  these  combinations.  Taken  as  a 
whole,  the  iron  and  steel  manufacturers  had  been  very  prosper- 
ous, but  the  severe  industrial  depression  which  began  in  1893 
and  lasted  until  1897  had  cut  into  their  profits  heavily.^  The 
manufacturers  were  anxious  to  restore  the  palmy  days,  and 
therefore  turned  to  combination  and  monopoly  as  likely  to  prove 

'  223  Fed.  Rep.  168. 

'^  Average  Prices  of  Certain  Iron  and  Steel  Products  in  1898, 
1899,  AND  March  and  October,  1900  * 


Cmnmodity 


Per  gross  ton 


1899 

$18.88 

29 

81 

28 

13 

49 

36 

40 

49 

95 

48 

52 

04 

41 

36 

60 

24 

March, 
1900 


October, 
1900 


Pig  iron  j 

Billets  t 

Rails  t 

Plates  t 

Structural  shapes  (beams)  t 

Tin  plates  § 

Wire  nails  f 

Bars  t 

Sheets  (black)  t 


K10.32 
15.18 
17  63 
24.23 
26.25 
64.08 
29.91 
21.32 
42. 28 


$24.72 

3500 
45  25 
50.40 
108.42 
71.68 

50.40 
67.  20 


$13.06 
16.50 
26. 00 
24.19 
33  60 
93  86 
49.28 
24.42 
62.72 


*  Brief  for  the  United  States  (no.  481),  vol.  I,  pp.  39,  48. 

t  F.  o.  b.  Pittsburg. 

X  F.  o.  b.  Pennsylvania  manufacturing  plants. 

■§  F.  o.  b.  New  York. 

'  For  a  further  discussion,  see  p.  263. 

^The  competition  between  the  steel  manufacturers  was  not 
See  Jones,  Quarterly  Journal  of  Economics,  34,  pp.  497-502. 


iq8     the  trust  problem  in  the  united  states 

more  effective  than  pools,  which  were  not  only  industrially 
unstable,  but  illegal  as  well. 

A  second  advantage  in  combination  lay  in  the  possibilities 
of  integration.  A  company  which  combined  under  one  manage- 
ment the  successive  stages  in  the  productive  process  was  able  to 
effect  certain  economies  that  were  not  open  to  a  nonintegrated 
concern.  These  economies  included  a  saving  in  fuel  costs  (those 
connected  with  the  reheating  of  the  metal),  a  saving  in  the  labor 
and  time  involved  in  moving  the  materials,  and  the  utilization 
of  by-products,  especially  blast  furnace  gas.  These  particular 
economies,  of  course,  could  be  availed  of  only  by  a  vertical  com- 
bination (an  integrated  concern);  a  horizontal  combination  (a 
combination  of  plants  making  substantially  the  same  product) 
must  justify  itself,  if  at  all,  on  other  grounds;  must  point  to  other 
economies  than  those  mentioned.  On  this  phase  of  the  matter 
more  will  be  said  later,^  but  we  may  note  at  this  point  the  neces- 
sity of  keeping  clearly  in  mind  the  distinction  between  the 
economies  in  producing  and  selling  that  were  attainable  by 
such  of  these  combinations  as  did  not  possess  monopolistic 
power  (the  Carnegie  Company,  the  Federal  Steel  Company,  and 
the  National  Steel  Company,  for  example),  and  the  additional 
economies  that  might  be  secured  through  the  organization  of 
a  trust  (with  monopolistic  power),  as,  for  example,  the  American 
Tin  Plate  Company,  the  American  Steel  and  Wire  Company,  and 
the  National  Tube  Company.  The  economies  permitted  by 
integration  were  notable,  and  no  doubt  combinations  formed  to 
realize  them  were  in  the  public  interest.  Yet,  as  we  have  seen,  a 
number  of  these  early  steel  combinations  were  not  vertical 
combinations,  but  horizontal  combinations.  They  were  not 
organized  for  the  purpose  of  securing  the  advantages  of  integra- 
tion, but  the  profits  of  monopoly.  As  the  Circuit  Court  said: 
"Properties  were  assembled  and  combined  with  less  regard  to 
their  importance  as  integral  parts  of  an  integral  whole  than  to 
the  advantages  expected  from  the  elimination  of  the  competition 
which  theretofore  existed  between  them."  ^ 

^  See  ch.  19. 

2  223  Fed.  Rep.  167. 


THE  UNITED  STATES  STEEL  CORPORATION  199 

Another  gain  from  integration  was  the  possibihty  it  offered  of 
securing  the  profits  which  would  otherwise  go  to  the  manufac- 
turers or  producers  of  the  products  at  the  earHer  stages.  Here 
was  an  opportunity  to  apply  Mr.  Rockefeller's  maxim,  "pay  a 
profit  to  nobody."  The  gain  was  especially  worth  while  because 
of  the  possibihty  that  a  pool  or  combination  controlling  the 
necessary  raw  material  or  semi-finished  products  might  charge 
unreasonable  prices.  The  company  producing  its  own  raw 
materials  was  assured  an  ample  supply  of  them  at  cost  to  itself. 
With  it  companies  not  so  well  fortified  could  not  compete 
advantageously. 

The  third  advantage  offered  by  the  combination  was  the 
opportunity  of  making  profits  from  the  sale  of  the  securities 
of  the  consolidated  companies.  The  profits  which  were  made  in 
this  way  were  of  two  kinds:  first,  those  made  by  the  manufac- 
turers themselves;  and,  second,  those  made  by  the  promoters. 
That  the  promoters  had  a  direct  financial  inducement  to  form 
combinations  and  trusts  is  shown  by  the  fact  that  the  promoters 
of  seven  of  these  organizations  (Federal  Steel  Company,  Na- 
tional Steel  Company,  American  Tin  Plate  Company,  American 
Steel  and  Wire  Company  of  New  Jersey,  National  Tube  Com- 
pany, American  Steel  Hoop  Company,  American  Bridge  Com- 
pany) received  in  the  aggregate  over  $63,000,000  in  stock  as  their 
pay.^  This  was  not  all  profit,  to  be  sure,  but  to  say  that  the 
compensation  was  very  liberal  is  expressing  it  mildly.  The 
profits  were  likely  to  be  greater,  of  course,  when  the  promoters 
were  successful  in  establishing  a  trust  than  when  they  simply 
effected  a  combination  possessing  no  monopoHstic  power.  Some 
of  these  iron  and  steel  combinations,  as  has  been  shown,  be- 
longed to  one  class;  some,  to  another. 

The  underlying  motive  in  the  formation  of  the  steel  combina- 
tions and  trusts  of  1 898-1 900  was,  as  we  have  seen,  the  restric- 
tion or  smothering  of  competition.  Yet  competition,  though 
greatly  restrained  in  several  branches  of  the  steel  industry,  was 
not  destroyed.  Indeed  it  soon  appeared  that  the  formation  of 
these  combinations  was  likely  to  lead  to  even  more  vigorous 

^  See  p.  287. 


200       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

competition  than  ever.  This  unexpected  outcome  was  the 
result  of  an  attempt  on  the  part  of  some  of  these  combinations 
to  integrate  themselves  so  fully  that  they  would  be  entirely 
independent  of  any  other  steel  concern.  To  ward  ofif  the  threat- 
ened competitive  struggle,  the  United  States  Steel  Corporation 
was  formed.  The  circumstances  leading  up  to  its  formation 
may  be  considered  in  some  detail. 

The  combinations  already  described  may  be  roughly  divided 
into  two  groups:  (i)  the  primary  group,  including  the  Carnegie 
Company,  the  Federal  Steel  Company,  and  the  National  Steel 
Company,  concerns  manufacturing  chiefly  semi-finished  steel 
and  the  heavy  steel  products;  (2)  the  secondary  group,  including 
the  American  Tin  Plate  Company,  the  American  Steel  and  Wire 
Company,  the  National  Tube  Company,  the  American  Steel 
Hoop  Company,  the  American  Sheet  Steel  Company,  the 
American  Bridge  Company,  and  the  Shelby  Steel  Tube  Com- 
pany, concerns  manufacturing  chiefly  the  lighter  and  more  highly 
elaborated  steel  products.  The  companies  in  the  secondary 
group  were  largely,  some  almost  entirely,  dependent  on  the 
primary  group  for  the  semi-finished  steel  which  constituted 
their  raw  material;  while  the  primary  group,  in  turn,  disposed  of 
a  large  part  of  its  output  to  the  secondary  group.  There  was 
thus  a  marked  interdependence  among  the  two  groups,  and  for 
a  while  all  went  well. 

This  state  of  harmony,  however,  was  not  to  endure.  During 
1900  the  steel  trade  suffered  a  reaction,  which  made  necessary 
the  reduction  of  expenses,  if  returns  large  enough  to  pay  divi- 
dends on  watered  stock  were  to  be  realized.  Some  of  the 
concerns  in  the  secondary  group  soon  proposed  therefore  to 
integrate  themselves  still  further,  and  thus  to  obtain  their  raw 
material  at  cost.  The  American  Steel  and  Wire  Company  of 
New  Jersey,  for  example,  made  plans  to  build  additional  blast 
furnaces  and  a  large  steel  plant.  The  Carnegie  Company  and 
the  Federal  Steel  Company,  both  of  which  had  just  enlarged 
their  works,  therefore  faced  the  loss  of  a  market  for  a  consider- 
able part  of  their  output.  To  protect  themselves,  they  decided 
to  produce  the  more  highly  elaborated  products,  thus  making  use 


THE  UNITED  STATES  STEEL  CORPORATION  201" 

of  nearly  their  entire  semi-finished  steel  output  and  freeing 
themselves  from  their  dependence  on  other  steel  manufacturers. 
In  1900  the  Federal  Steel  Company  proposed  to  undertake  the 
manufacture  of  tubes  and  structural  material.  In  the  summer  of 
1900  it  was  reported  that  the  Carnegie  Company  would  engage 
on  a  large  scale  in  the  manufacture  of  wire  rods.  In  January, 
1901,  the  Carnegie  Company  announced  that  it  proposed  to 
build  at  Conneaut  Harbor,  Ohio,  the  largest  pipe  and  tube  plant 
in  the  world. ^  The  impression  was  current  that  the  Carnegie 
Company  would  eventually  make  tin  plate,  sheet  steel,  and  other 
finished  products.  The  outcome  of  this  policy  of  retaliation 
would  clearly  be  two-fold :  first,  an  increase  in  the  country's  pro- 
ductive capacity  far  beyond  its  normal  consuming  power;  and, 
second,  an  abrupt  termination  of  the  monopolistic  or  semi- 
monopolistic  position  attained  by  the  concerns  in  the  secondary 
group. 

A  severe  competitive  struggle  thus  seemed  imminent.  And  in 
such  a  struggle  it  was  generally  believed  that  the  Carnegie  Com- 
pany would  emerge  the  victor.  This  concern  was  credited  with 
owning  the  best  equipped  and  best  managed  steel  plant  in  the 
country,  if  not  in  the  world.  In  self-sufficiency  of  product  it  was 
well  ahead  of  its  rivals.  In  fact,  there  seems  to  have  been  little 
doubt  that  from  the  manufacturing  standpoint  the  Carnegie 
Company  would  have  proved  more  than  a  match  for  its  com- 
petitors, many  of  whom,  in  their  endeavor  to  monopolize  the 
business,  had  been  obliged  to  acquire  at  high  prices  numerous 
inferior  plants.  From  the  banking  and  financial  standpoint  the 
Carnegie  Company  was  equally  well  fortified.  It  had  ample 
capital  and  credit;  and  its  securities  were  closely  held,  hence  its 
owners  were  uninfluenced  by  stock  market  considerations.  As 
Mr.  Carnegie  had  remarked,  the  partners  knew  nothing  about 
the  manufacture  of  bonds  and  stocks;  they  knew  only  about  the 
manufacture  of  steel.  The  Morgan  companies — the  Federal 
Steel  Company,  the  National  Tube  Company,  and  the  American 
Bridge  Company — naturally  had  excellent  financial  backing,  but 

1  Brief  for  the  United  States  (no.  481),  vol  II,  pp.  479-481. 


202       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  Morgan  financiers  were  tied  up  in  other  Knes,  particularly 
railroad  enterprises,  and  they  did  not  welcome  a  steel  war.  The 
Lake  Superior  Consolidated  Iron  Mines  with  Rockefeller  support 
could,  of  course,  have  weathered  any  struggle,  but  this  company 
was  not  engaged  in  steel  manufacturing,  and  therefore  was  not 
directly  concerned.  The  remaining  companies,  however,  mostly 
Moore  concerns,  were  very  heavily  overcapitalized,  and  had  a 
highly  speculative  backing.  The  promoters  of  these  companies 
had  not  yet  had  sufficient  time  to  unload  on  the  public,  and  so 
far  as  they  were  concerned  a  trade  war  had  to  be  prevented  at  all 
hazards.  Could  the  conflict  be  averted,  the  promoters  could 
await  a  favorable  opportunity  for  the  disposal  of  the  stocks  held 
by  them,  and  they  might  even  realize  some  additional  profits 
through  the  sale  of  the  securities  of  the  consolidated  company 
on  the  rising  market  that  would  follow  the  restoration  of  har- 
monious relations. 

The  result  of  this  situation  was  the  formation  of  the  present 
steel  trust.  On  February  25,  1901,  the  United  States  Steel 
Corporation  was  incorporated  under  the  laws  of  New  Jersey 
(with  an  authorized  capital  stock  of  $3,000),  in  accordance  with  a 
plan  to  acquire  the  securities  of  the  Carnegie  Company,  the 
Federal  Steel  Company,  the  National  Steel  Company,  the 
American  Tin  Plate  Company,  the  American  Steel  and  Wire 
Company,  the  National  Tube  Company,  the  American  Steel 
Hoop  Company,  and  the  American  Sheet  Steel  Company.^  The 
offer  of  the  Steel  Corporation  to  exchange  its  securities  for  those 
of  the  companies  named  was  promptly  accepted  by  a  great 
majority  of  the  stockholders  (over  98  per  cent  in  each  case) ;  and 
therefore  on  April  i  the  Corporation  filed  amended  articles  of 
incorporation  whereunder  its  authorized  capital  stock  was 
increased  to  $1,100,000,000.-  By  this  process  of  exchange 
(when  completed)  the  Steel  Corporation  became  strictly  a  hold- 
ing company  trust.  Shortly  thereafter  it  acquired  the  American 
Bridge  Company,  the  Lake  Superior  Consolidated  Iron  Mines, 

'  Chron.,  72,  p.  441  (March  2,  1901). 

^Chron.,  72,  p.  679  (April  6,  1901).  For  the  terms  of  the  exchange  see 
Brief  for  the  United  States  (no.  481),  vol.  I,  pp.  54-56. 


THE  UNITED  STATES  STEEL  CORPORATION 


203 


the  Bessemer  Steamship  Company,  and  the  Shelby  Steel  Tube 
Company.^ 

The  restriction  of  competition  was  plainly  the  main  motive 
for  the  formation  of  the  Steel  Corporation.^  We  should  not  be 
surprised,  therefore,  to  learn  that  not  only  was  the  decline  in 
prices  then  taking  place  arrested,  but  that  prices  were  actually 
advanced.  This  is  shown  by  the  table  below,  giving  the  average 
monthly  price  of  certain  iron  and  steel  products  in  October,  1900 
(just  prior  to  the  negotiations  leading  to  the  organization  of  the 
Steel  Corporation),  and  their  price  in  May,  1901,  the  first  month 
after  the  organization  of  the  Corporation. 

Average  Price  of  Certain  Iron  and  Steel  Products  m    October, 
1900,  and  May,  1901  ' 

(Per  gross  ton) 


Commodity 

October,  1900 

May,  1901 

Pig  iron  ^ 

BQlets* 

Rails  6 

Plates  * 

Structural  shapes  (beams)  * 

Tin  plates ' 

Wire  nails  * 

$13-06 
16.50 
26.00 
24.19 
33-60 
93-85 
49.28 
24.42 
62.72 

$16.30 
24.00 
28.00 
35-39 
35  84 
93-86 
5152 
3158 
71.68 

Bars< 

Sheets  (black)  * 

Though  the  restriction  of  competition  was  the  controlling 
motive  in  the  organization  of  the  Steel  Corporation,  at  least  two 
other  influences  were  present.    One  was  the  desire  to  secure  large 

^  For  a  list  of  the  subsidiary  concerns  controlled  by  the  constituent 
companies  of  the  United  States  Steel  Corporation,  see  Brief  for  the  United 
States  (no.  481),  vol.  II,  pp.  753-762. 

''■  Judge  Woolley  in  a  separate  opinion  in  the  steel  trust  case  said  that  his 
conclusions  of  fact  and  of  law  were  that  the  organizers  of  the  Corporation 
intended  to  create  a  monopoly  and  to  restrain  trade.    223  Fed.  Rep.  178. 

*  Brief  for  the  United  States  (no.  481),  vol.  I,  pp.  48,  62. 

*  F.  o.  b.  Pittsburg. 

^  F.  o.  b.  Pennsylvania  manufacturing  plants. 
«F.  o.  b.  New  York. 


204       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

profits  through  the  sale  of  the  securities  of  the  new  company. 
This  matter  is  discussed  in  chapter  XII;  it  will  suffice  here  to 
point  out  that  the  underwriting  syndicate  realized  a  profit  of 
$62,500,000  through  the  promotion  of  the  Steel  Corporation. 

Another  reason  for  the  organization  of  the  Steel  Corporation 
was  the  desirability  of  integrating  the  business  more  fully,  and  of 
securing  the  economies  of  the  trust  form  of  organization.  These 
two  considerations,  to  repeat,  must  be  sharply  distinguished. 
Complete  integration  can  be  secured  without  resort  to  a  trust, 
1.  e.,  without  attaining  a  monopolistic  position  at  any  stage  in  the 
process  of  production,  whereas  the  economies  of  the  trust  form  of 
organization  can  be  secured,  of  course,  only  by  a  trust.  The 
significant  inquiry  always  is:  can  a  trust  produce  more  cheaply 
than  a  combination,  more  cheaply  even  than  a  highly  integrated 
combination?  If  it  can,  anti-trust  legislation  is  likely  to  prove 
futile.  Now  the  organization  of  the  Steel  Corporation  did  lead 
to  a  somewhat  greater  degree  of  integration.  The  bringing  to- 
gether under  one  control  of  the  iron  ore  mines,  the  iron  ore  rail- 
roads, the  Lake  vessels,  the  coking  coal  properties,  and  the  plants 
making  all  kinds  of  iron  and  steel  products  meant  that  the  Cor- 
poration was  quite  independent  of  others,  and  that  no  profits  at 
any  stage  in  the  productive  process  need  to  be  paid  to  anyone 
else.  So  far  as  the  manufacturing  processes  were  concerned,  it  is 
doubtful  whether  anything  particular  was  gained;  the  advan- 
tages of  integration  were  already  about  as  fully  realized  by  the 
larger  and  stronger  of  the  constitutent  companies,^  such  as  the 
Carnegie  Company,  or  if  not  already  realized,  would  have  been 
upon  the  completion  of  the  extensions  proposed  in  igoo  to  1901. 

As  to  the  economies  of  the  trust  form  of  organization  detailed 
information,  as  usual,  is  difficult,  if  not  impossible,  to  secure.'^ 

^  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  108. 

^  The  Bureau  of  Corporations  in  part  III  of  its  Report  on  the  Steel  Indus- 
try made  a  study  of  the  cost  of  producing  various  steel  products,  but  its 
investigation  threw  no  light  on  the  costs  of  the  Steel  Corporation  as  com- 
pared with  the  costs  of  other  large  and  well  integrated  concerns.  In  fact, 
the  Bureau,  in  order  to  protect  the  privacy  of  business,  particularly  refrained 
from  giving  any  figures  which  would  reveal  the  costs  at  the  several  inde- 
pendent plants. 


THE  UNITED  STATES  STEEL  CORPORATION  205 

It  is  probable  that  the  steel  trust,  simply  because  it  was  a  trust, 
did  effect  certain  savings.  The  combining  of  so  many  manu- 
facturing properties  under  one  management  probably  made 
possible  a  more  economical  subdivision  of  the  business  whereby 
particular  plants  could  specialize  on  certain  products,  with 
a  consequent  reduction  in  cost.  The  distribution  of  the  Steel 
Corporation's  plants  also  gave  it  an  important  advantage 
with  respect  to  transportation  costs;  it  could  ship  from  the 
nearest  mill,  and  thus  save  cross  freights.^  Savings  were  un- 
doubtedly effected  through  competition  between  the  managers 
of  the  different  plants;  and  a  more  complete  utilization  was  made 
of  certain  by-products,  such  as  blast  furnace  slag  (used  in  the 
manufacture  of  cement),  which  was  formerly  a  waste  product.- 
No  doubt,  also,  the  large  capital  possessed  by  the  Steel  Corpora- 
tion assisted  it  in  developing  the  export  trade — claimed  by  the 
promoters  to  be  one  of  the  principal  reasons  for  forming  the 
Corporation — but  it  does  not  follow  that  the  amount  of  capital 
required  could  have  been  supplied  only  by  a  trust.  How  im- 
portant the  above  enumerated  economies  were  it  is  not  possible 
to  say,  but  in  view  of  the  rapid  growth  of  the  independent  con- 
cerns, as  described  later,  it  is  not  Hkely  that  they  were  control- 
ling. Certainly  few,  if  any,  economies  were  achieved  by  the 
trust  in  the  selling  end;  selling  expenses  in  the  iron  and  steel  trade 
are  a  comparatively  minor  factor.^  In  fact,  the  Commissioner  of 
Corporations  believes,  the  argument  of  economy  in  production 
was  probably  brought  forward  to  justify  the  establishment  of  the 
trust,  and  to  promote  the  sale  of  the  company's  securities;  the 

1  Mr.  Schwab  at  a  dinner  held  on  December  12,  1900,  discussed  the  ad- 
vantages that  might  be  derived  from  a  combination,  and  referred  specifically 
to  specialization,  location  of  plants  near  the  centers  of  consumption,  com- 
petition of  the  several  managements,  reduction  in  overhead  expense,  and 
the  development  of  the  export  trade.  He  expressed  the  opinion  that  from  a 
metallurgical  or  mechanical  standpoint  the  limit  of  economies  had  been 
reached,  or  nearly  so,  so  highly  perfected  had  the  processes  of  manufacture 
become.    Brief  for  the  United  States  (no.  481),  vol.  II,  pp.  508-510. 

*  Brief  for  the  United  States  Steel  Corporation  (no.  481),  pp.  106- 
107. 

'  Report  of  the  Commissioner  of  Corporations,  part  III,  pp.  20-21. 


2o6       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

main  reason  for  the  organization  of  the  Steel  Corporation  was 
certainly  the  hope  of  averting  the  threatening  competitive 
struggle.^ 

The  capitalization  of  the  Steel  Corporation  was  enormous. 
Under  its  amended  certificate  of  incorporation  it  issued  $304,- 
000,000  of  bonds,  exclusive  of  $81,000,000  underlying  indebted- 
ness, and  was  authorized  to  issue  $1,100,000,000  of  stock,  half 
preferred  and  half  common.  All  of  the  bonds  and  $425,000,000 
of  each  class  of  the  stock  were  issued,  mainly  in  exchange  for  the 
securities  of  the  companies  first  acquired."  Shortly  after  its 
organization  the  Corporation  acquired  the  Lake  Superior  Con- 
soHdated  Iron  Mines  and  other  concerns,  and  as  a  result  its  issue 
of  each  class  of  stock  increased  to  over  $500,000,000,  making  a 
total  stock  issue  of  over  $1,000,000,000.  The  Steel  Cor- 
poration, measured  by  capitalization,  and  perhaps  by  any 
test,  was  the  largest  industrial  corporation  the  country  had 
yet  produced. 

The  company  upon  its  organization  controlled  three-fifths  of 
the  steel  business  of  the  country.^  It  produced  almost  60  per 
cent  of  the  pig  iron  used  for  steel  making  purposes,  about  66  per 
cent  of  the  crude  steel  output,  and  about  50  per  cent  of  the 
finished  steel  products  in  the  manufacture  of  which  it  was 
engaged.  It  had  hundreds  of  millions  of  tons  of  iron  ore;  over 
50,000  acres  of  the  best  coking  coal  lands;  over  1,000  miles  of 
railroad,  including  the  iron  ore  railroads;  more  than  one  hundred 
Lake  vessels;  and  large  miscellaneous  holdings,  such  as  docks, 
natural  gas  and  limestone  properties.  Yet  despite  its  enormous 
size  the  Steel  Corporation  did  not  secure  a  monopoly  of  the  iron 
and  steel  industry,  though  in  certain  lines  its  position  was  dis- 
tinctly monopohstic.^    This  is  indicated  by  the  following  table, 

'  Report  of  the  Commissioner  of  Corporations,  part  I,  pp.  108-109. 

*  Ibid.,  p.  106. 
^  Ibid.,  p.  109. 

*  That  its  position  was  not  even  more  monopolistic  in  certain  lines  resulted 
from  the  fact  that  some  of  the  constituent  trusts  had  lost  heavily  in  their 
percentage  of  the  country's  trade  since  their  organization  some  two  or  three 
years  previous.  See  on  this  point  Brief  for  the  Steel  Corporation  (no.  481), 
p.  77,  and  223  Fed.  Rep,  134. 


THE  UNITED  STATES  STEEL  CORPOIL\TION  207 

showing  the  Steel  Corporation's  computation  of  its  proportion  of 
the  country's  output  of  the  leading  products  in  1901.^ 

Per  cent 

Pig  iron,  spiegel  and  ferromanganese 43 . 2 

Steel  ingots  and  castings 65 . 7 

Rails 59.8 

Structural  shapes 62.2 

Plates  and  sheets 64 . 6 

Black  plate  produced  in  tin  mills 79-8 

Coated  tin-mill  products 73 .  i 

Black  and  coated  sheets  produced  in  tin  mills  67.3 

Wire  rods 77.7 

Wire  nails 68 .  i 

Wrought  pipe  and  tubes 57-2 

Seamless  tubes 82.8 

Among  the  more  important  rivals  of  the  Steel  Corporation 
in  1901  were  Jones  and  Laughlin,  the  Lackawanna  Iron  and 
Steel  Company,  the  Republic  Iron  and  Steel  Company,  the 
Pennsylvania  Steel  Company,  the  Cambria  Steel  Company,  and 
the  Bethlehem  Steel  Company.  The  Colorado  Fuel  and  Iron 
Company  because  of  its  location  was  not  an  effective  rival, 
though  the  Steel  Corporation  conducted  negotiations  looking 
toward  its  acquisition;  and  the  Tennessee  Coal,  Iron  and  Rail- 
road Company  was  at  this  time  chiefly  engaged  in  the  produc- 
tion of  foundry  pig  iron. 

The  capitalization  of  the  Steel  Corporation  as  noted  above 
was  enormous.  But  so  was  the  amount  of  property  acquired. 
Was  the  Corporation  overcapitalized? 

The  capitaUzation  of  the  company  in  1901  after  the  acquisi- 
tion of  the  Shelby  Tube  Company  (in  August)  was  as  follows:  ^ 

Steel  Corporation  bonds $303,450,000 

Underlying  bonds 59,091,657 

Purchase  money  obligations,  etc 21,872,023 

Preferred  stock 510,205,743 

Common  stock 508,227,394 

Total $1,402,846,817 

^  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  365.  See  also 
p.  214.  2  Ibid.,  p.  lA- 


2o8       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

The  Bureau  of  Corporations  made  a  detailed  study  of  the  value 
of  the  properties  of  the  Steel  Corporation  in  1901  in  order  to 
determine  whether  the  company  was  overcapitahzed,  and  if  so, 
to  what  extent.  Three  different  methods  were  employed.  The 
first  method  was  an  historical  study,  an  analysis  of  the  invest- 
ment of  the  constituent  companies  at  the  time  of  their  organiza- 
tion. The  second  method  was  a  mathematical  computation,  a 
summation  of  the  market  value  of  the  securities  of  the  constitu- 
ent companies,  using  the  average  w^eekly  prices  from  the  date  of 
the  organization  of  these  combinations  up  to  December  31,  1900. 
The  market  prices  during  the  early  months  of  1901  were  not 
included,  since  these  were  naturally  influenced  by  the  prospec- 
tive organization  of  the  Steel  Corporation.  This  second  method 
represented  the  estimate  put  by  the  public  on  the  securities  of 
the  constituent  companies,  and  it  therefore  reflected  the  prob- 
able earning  power  of  these  combinations.  The  third  method 
was  a  physical  valuation,  a  detailed  estimate  of  the  physical 
properties  of  the  Steel  Corporation  by  departments  of  its  busi- 
ness, the  valuation  of  the  ore  properties  being  made  in  particular 
detail.  The  valuation  arrived  at  by  the  Bureau  by  the  first 
method  was  $676,000,000;  by  the  second  method,  which  included 
intangible  items,  $793,000,000;  and  by  the  third  and  more 
accurate  method,  $682,000,000.^ 

The  conclusion  of  the  Bureau,  therefore,  was  that  the  entire 
issue  of  common  stock  was  water,  i.  e.,  had  no  property  back  of 
it;  and  that  a  large  amount,  one-fifth  to  two-fifths,  of  the  pre- 
ferred stock  was  water.  Even  including  the  intangible  assets,  the 
common  stock  represented  nothing  but  the  hope  of  monopoly 
gains.  By  any  reasonable  standard,  therefore,  the  Steel  Corpora- 
tion was  very  heavily  overcapitalized. 

After  1901,  however,  the  Steel  Corporation  added  greatly  to 
its  investment.  This  it  did,  first,  by  the  construction  of  addi- 
tional plants  out  of  surplus  earnings  or  out  of  the  proceeds  of 
issues  of  securities;  and,  second,  by  the  acquisition  of  competing 
concerns  through  the  sale  of  its  own  securities.  The  most 
important  piece  of  new  construction  was  the  plant  at  Gary, 
'  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  15. 


THE  UNITED  STATES  STEEL  CORPORATION  209 

Indiana,  the  largest  steel  plant  in  the  world.  This  plant  up  to 
December,  191 1,  by  which  date  practically  all  the  construction 
then  authorized  had  been  completed,  had  cost  over  $62,000,000.^ 
Another  new  steel  plant  was  built  in  Duluth,  Minnesota,  and  a 
very  large  cement  works  was  constructed  in  Bufl&ngton  (near 
Chicago)  by  the  Universal  Portland  Cement  Company,  a  sub- 
sidiary of  the  Steel  Corporation.  Other  important  additions  also 
were  made  by  the  Steel  Corporation  (through  its  subsidiaries). 

The  investment  of  the  Steel  Corporation  has  likewise  been 
increased  through  the  acquisition  of  competing  companies. 
In  1902  the  Steel  Corporation  purchased  the  Union  Steel  Com- 
pany, which  held  large  deposits  of  iron  ore  and  coking  coal ;  and 
in  1904  it  acquired  all  the  stock  of  the  Clairton  Steel  Company, 
then  in  receiver's  hands,  but  in  the  possession  of  important  ore 
and  coking  coal  lands. 

But  far  more  important  was  the  purchase  in  November,  1907, 
of  the  Tennessee  Coal,  Iron  and  Railroad  Company.  This 
company,  with  its  main  plant  located  at  Ensley,  Alabama,  was 
the  most  important  iron  and  steel  concern  in  the  south.  It  pro- 
duced 3  per  cent  of  the  country's  output  of  iron  ore,  2.9  per  cent 
of  the  output  of  coke,  2.4  per  cent  of  the  pig  iron,  i.i  per  cent  of 
the  ingots  and  castings,  and  4.3  per  cent  of  the  rails.^  Partly 
because  of  the  fact  that  all  the  essential  materials  were  assembled 
by  nature  within  a  radius  of  a  few  miles,  the  Tennessee  Company 
was  able  to  manufacture  pig  iron  cheaper  than  it  could  be  made 
in  any  other  section  of  the  United  States.^  The  company  was 
controlled  by  powerful  financial  interests;  and  improvements 
were  then  under  way  to  double  its  steel  output  and  rail  capacity. 
The  Tennessee  Company  made  open-hearth  steel  rails — in 
1907  it  produced  59.1  per  cent  of  the  total  output  of  open- 
hearth  rails — and  was  thus  in  a  position  to  profit  by  the  in- 
creasing demand  for  that  type  of  rail.^  But  the  most  impor- 
tant assets  of  the  Tennessee  Company  were  its  enormous  hold- 

1  Tenth  Annual  Report  of  the  Steel  Corporation,  p.  28. 
^  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  258. 
'  Brief  for  the  United  States  (no.  6214),  part  I,  p.  11. 
*  Ibid.,  (no.  481),  voj.  II,  p.  731. 


2IO       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

ings  of  ore  and  coal;  it  owned  more  iron  ore  and  coal  adapted  for 
making  steel  than  any  company  in  the  United  States  except  the 
Steel  Corporation.^  There  can  be  no  doubt  that  the  desire  to 
secure  these  deposits  had  much  to  do  with  the  purchase  of  the 
company.  Moreover,  the  acquisition  of  the  Tennessee  Company 
made  it  impossible  for  it  to  effect  a  combination  with  the 
Republic  Iron  and  Steel  Company  and  the  Sloss-Sheffield 
Steel  and  Iron  Company,  as  had  been  planned,  and  thus  to 
become  an  even  more  formidable  competitor  of  the  United 
States  Steel  Corporation. 

The  construction  of  new  plants  and  the  acquisition  of  compet- 
ing plants  greatly  increased  the  investment  of  the  Steel  Corpo- 
ration. This  investment  in  igoi,  as  shown  above,  was  $676,000,- 
000.  Between  1901  and  the  close  of  1910  the  investment  in- 
creased by  $504,928,653,  of  which  amount  about  $435,000,000 
was  provided  for  out  of  surplus  earnings.^  By  December  31, 
1910,  therefore,  the  total  investment  of  the  Steel  Corporation 
amounted  to  $  i ,  1 8 1 ,000 ,000 .  The  capitalization  of  the  company 
on  the  same  date  was  $1,468,033,260,  or  about  $287,000,000  in 
excess  of  the  investment.  In  other  words,  about  $287,000,000 
of  the  Steel  Corporation's  stock  was  still  "water."  It  is  apparent 
that  after  1901  the  Corporation  squeezed  out  a  large  part  of  the 
water  in  its  stock.  In  1901  the  amount  of  water  had  been  $726,- 
000,000,  using  the  actual  investment  as  the  basis  of  calculation, 
and  $720,000,000,  using  the  physical  valuation  as  the  basis.  By 
1910  the  amount  of  water  had  been  reduced  to  $287,000,000  by 
the  first  method  of  calculation,  and  to  $281,000,000  by  the  second. 
All  of  the  water  had  been  extracted  from  the  preferred  stock,  and 
about  half  of  the  water  from  the  common  stock. 

To  have  added  so  greatly  to  the  value  of  its  property,  the 
earnings  of  the  Steel  Corporation  must  have  been  enormous. 
That  they  were  so  in  fact  is  indicated  by  the  table  below,  show- 
ing for  the  years  1901  to  1910 — the  government  dissolution  suit 

1  Brief  for  the  United  States  (no.  6214),  part  I,  pp.  lo-ii. 

2  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  49.  This  increase 
in  the  investment  was  over  and  above  a  proper  allowance  for  maintenance, 
repairs,  and  depreciation. 


THE  UNITED  STATES  STEEL  CORPORATION 


211 


was  brought  in  191 1 — the  total  investment  of  the  Steel  Corpora- 
tion in  tangible  property,  the  net  earnings,  and  the  ratio  of  the 
net  earnings  to  the  investment.^ 


Year  ending 
December  ji 

Total  investment 

in  tangible  property. 

000  omitted 

Net  earnings  ^ 

A)nount. 
000  omitted 

Per  cent 

IQOI 

$    698,869 

763,574 
806,615 
818,238 
874,840 

947,397 
1,078,763 
1,090,425 
1,146,875 
1,186,982 

t  77,741  ' 

121,502 

94,156 

62,491 

112,830 

143,393 
155,416 

84,793 
120,807 
127,216 

TA    8  * 

1002 

15 

II 

7 
12 

15 

14 

7 

10 
10 

9 

7 
5 

IQO^ 

IQ04 

lOO? 

9 

1906 

IQ07 

4 

8 

1008 

1909 

I9I0 

5 

7 

Average 

941,258 

112,856 

12.0 

The  table  shows  that  the  net  earnings  of  the  Steel  Corporation 
ranged  from  $62,000,000  in  1904  (its  worst  year)  to  $155,000,000 
in  1907  (its  best  year);  and  averaged  $112,000,000  for  the  ten 
year  period.  By  the  side  of  such  earnings,  the  profits  of  the 
Standard  Oil  Company,  large  as  they  were,  seem  small  indeed.^ 
The  table  shows  further  that  the  profits  of  the  Steel  Corporation 
from  1901  to  1910  averaged  12  per  cent  on  its  investment.  The 
average  rate  of  profit,  however,  underestimates  the  prosperity  of 

^  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  54. 

2  The  net  earnings  are  not  those  given  in  the  annual  reports  of  the  Steel 
Corporation;  the  Bureau  has  revised  the  Corporation's  figures  somewhat. 
Thus,  the  Corporation  deducted  interest  on  its  bonds  in  determining  its  net 
earnings;  the  Bureau  restored  these  interest  payments  to  the  net  earnings, 
as  it  was  desirous  of  finding  out  what  the  property  actually  earned  rather 
than  the  distribution  of  earnings  among  the  different  classes  of  security 
holders.  Other  changes  were  made  by  the  Bureau  in  arriving  at  its  figures 
of  net  earnings. 

'  Nine  months,  April  to  December. 

*  Indicated  rate  per  annum,  based  on  actual  earnings  for  nine  months. 

6  Cf.  p.  88. 


212       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  Steel  Corporation.  In  the  first  place,  the  investment  in- 
cluded a  large  amount  of  idle  property,  particularly  undeveloped 
iron  ore  lands;  and  this  naturally  tended  to  reduce  the  rate  of 
profit  on  the  investment.  But  more  important,  the  profit  of  12 
per  cent  covered  the  entire  investment,  whether  that  investment 
was  represented  by  5  per  cent  bonds,  7  per  cent  preferred  stock, 
or  common  stock.  The  rate  of  profit  on  the  investment  repre- 
sented by  common  stock  was  of  course  much  higher  than  1 2  per 
cent.  But  just  how  much  higher,  it  is  not  possible  to  say;  the 
Bureau  found  it  impossible  to  make  a  satisfactory  computation. 
The  net  earnings  of  the  Corporation,  the  sum  available  for 
dividends  on  its  common  stock,  and  the  percentage  earned  and 
paid  on  its  common  stock  during  the  years  1901  to  191 1  (the 
year  in  which  the  government  suit  was  brought)  are  shown  in 
the  table  below. 


Earnings  and  DrvroENDS  of  the  Steel  Corporation, 

1901   TO    I9II 

Net  earnings} 
000,000  omitled 

Earned  on 
common  stock. 
000,000  omitted 

Earned  on 
common  stock 
Per  cent 

Paid  on 

common  stock 

Per  cent 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

1910 

1911 

$84^ 

133 
109 

73 
119 

156 
160 
91 
131 
141 
104 

$34 
54 

25 

5 
43 
72 

79 

20 

53 
62 

30 

9 
10 

4 

0 

8 

14 

15 

4 

10 

12 

5 

08 

74 
92 

99 
53 
34 
61 

05 
59 
23 
92 

2.00 
4.00 
3-50 

1.50 
2.00 

2.CX) 

2-75 
5-50 
5.00 

In  view  of  the  fact  that  all  of  the  common  stock  was  "water,'' 
this  record  must  have  been  quite  gratifying  to  the  stockholders 
of  the  Corporation.    How  much  more  so  must  this  have  been 

^  After  deduction  of  expenses  for  ordinary  repairs  and  maintenance, 
interest  on  bonds,  fixed  charges  of  subsidiary  companies,  and  employees* 
bonus  funds.    Cf.  p.  2U  (note). 

2  Nine  months  only. 


THE  UNITED  STATES  STEEL  CORPORATION  213 

true  in  191 6,  when  because  of  the  unusual  demands  for  steel 
arising  out  of  the  war  there  was  earned  on  the  common  stock 
$246,000,000,  or  48.46  per  cent! 

Yet  in  spite  of  the  large  sums  expended  in  the  construction  of 
new  plants,  in  spite  of  the  acquisition  of  important  competitors, 
and  in  spite  of  its  enormous  earnings,  the  Steel  Corporation  was 
not  able  to  maintain  the  prominent  position  which  it  held  at  its 
organization  in  1901.  This  is  indicated  by  the  table  on  page  214, 
showing  the  proportion  of  the  country's  business  done  by  the 
Steel  Corporation  in  the  various  lines  during  the  years  1901  to 
1910  ^  (the  last  year  prior  to  the  dissolution  suit). 

With  respect  to  iron  ore,  the  Steel  Corporation  maintained 
fairly  well  down  to  1910  the  position  which  it  attained  in  1901. 
Regularly  after  its  formation  it  produced  about  45  per  cent  of  the 
total  output  of  iron  ore  (1904  was  an  off  year).  In  1908  and 
1909,  indeed,  it  produced  even  more  proportionately  than  in 
1901,  yet  this  was  because  of  the  purchase  in  1907  of  the  Tennes- 
see Coal,  Iron  and  Railroad  Company,  producing  about  3  per 
cent  of  the  total  output  of  iron  ore.  But  since  80  to  90  per  cent 
of  the  ore  used  for  steel  making  purposes  comes  from  the  Lake 
Superior  region,  the  Steel  Corporation's  proportion  of  the  Lake 
shipments  gives  a  better  idea  of  its  importance  as  an  ore  pro- 
ducer. And  these  figures  tell  a  somewhat  different  story.  In 
1901  the  Steel  Corporation  controlled  over  61  per  cent  of  the  ore 
shipped  from  the  Lake  Superior  region;  in  19 10  only  51  per  cent. 
This  points  to  a  relative  increase  in  the  business  done  by  the 
independent  element. 

In  the  production  of  coke  likewise  the  Steel  Corporation  lost 
ground  after  its  formation.  In  1902 — the  data  are  not  available 
for  1 901 — it  produced  37.4  per  cent  of  the  country's  output  of 
coke;  in  19 10  only  32.7  per  cent.  These  statistics,  however,  are 
for  the  total  output  of  coke,  and  not  simply  for  the  coke  used  in 
the  production  of  iron  and  steel.  The  Corporation  produced  a 
larger  percentage  of  the  coke  used  in  the  iron  and  steel  industry 

'  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  364.  The  figures 
for  the  actual  production  of  the  Steel  Corporation  and  of  the  independents 
from  1901-1910  are  shown  on  pp.  360-363. 


214       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 


Proportion  of  Country's  Output  of  Iron  Ore,  Coke,  and  Various 
Iron  and  Steel  Products  Controlled  by  the  United  States  Steel 
Corporation,  1901-1910 

From   annual   statistical   reports   of   the   American   Iron   and 
Steel   Association 


'01 

'02 

'03 

'04 

'05 

'06 

'07 

'08 

'09 

'10 

Iron  ore: 

Total  production .... 

Shipments  from 

Lake  region 

Coke   

43-9 

61.6 
1 

42.4 

42. Q 

45 -I 

60.4 
37-4 
44-3 

44-7 

43.8 

58.8 
34-2 
39-9 

40.4 

37-9 

53-8 
36.6 

44-3 

44.6 

43-4 

56.0 

37-9 

43-8 

44.2 

43-2 

54-2 

36.5 
44.2 

44-5 

43-3 

54-7 
303 
41 -7 

41.9 

46.3 

56.0 

313 

43-2 

43  S 

45-7 

51-4 
34-6 

44.8 

45  0 

44-3 

510 
32.7 
430 

43-3 

Pig  iron 

Pig  iron,  spiegeleisen, 
ferromanganese 

Ingots  and  castings: 
Bessemer 

70.  2 
66.3 

73-9 
52.4 

65-7 

72.0 
Si.o 

63.5 

69.0 
50-4 

61.0 

67.4 
51-4 

60.2 

65 -7 
49.6 

S8.i 

64.7 
47-9 

56.4 

66.2 
48.2 

56.1 

62.7 
51-8 

56.0 

At  6 

Open-hearth 

Total 

SO. 8 
54-7 

Rolled  products: 

Bessemer  steel  rails  . . 
Open-hearth  steel  rails 
Structural  shapes .... 
Plates  and  sheets .... 
Wire  rods 

59-9 
2 

62.  2 

64.6 

77.6 

27-3 

50.1 

65-4 
2 

57-9 
59-4 
71-5 
311 

50.8 

65.6 
2 

60.3 
59-9 
731 
29.8 

SI-2 

57-2 
2 

55-1 
58.0 

71-3 
28.6 

47.8 

53-6 
2 

54-6 

57-4 
69.9 
31.0 

47-3 

52.6 

54-6 
56.3 
71.7 
33-8 

48.1 

51-6 
2 

54-9 
55-8 
71S 
33-9 

47-5 

58.6 
46.3 
47   I 
51-9 
67.9 

319 
47   I 

57-3 
57-5 
47   I 
49.8 
69.7 
39-4 

48.9 

60.2 
57-4 
513 
48.0 
67.1 

Bars,  skelp,  etc 

Total  finished  rolled 
products 

37.6 

,18    T 

Secondary  products ': 
Wire  nails 

65.8 

1 

64.8 
• 

70.6 

I 

67.0 
1 

66.1 

I 

65-5 

66.4 

1 

61 . 2 
72.0 

60.7 
61.9 

55.4 

Tin  plates  and 
Teme  plates 

61.0 

'  Data  not  available. 

*  None  produced  by  the  Steel  Corporation. 

*  These  are  the  only  secondajy  products  for  which  data  are  available. 


THE  UNITED  STATES  STEEL  CORPORATION  215 

than  these  figures  indicate.  ControUing,  as  it  did,  the  choicest 
coking  coal  lands  in  the  Connellsville  region,  it  was  well  situated 
with  respect  to  its  supplies  of  coking  coal. 

The  percentage  of  the  pig  iron  production  of  the  country 
controlled  by  the  Steel  Corporation  remained  practically  un- 
changed between  1901  and  1910.  In  the  former  year  it  produced 
42.4  per  cent  of  the  total;  in  the  latter  43.0  per  cent.  Here  again 
the  figures  are  for  the  total  production,  rather  than  the  produc- 
tion for  steel  making  purposes;  and  therefore  they  do  not  show 
the  real  importance  of  the  Steel  Corporation  in  this  field.  Yet  it 
is  evident  that  the  business  of  the  independents  increased  con- 
siderably, since  in  1910  they  produced  about  the  same  percentage 
as  in  1901,  despite  the  acquisition  by  the  Corporation  of  the 
Union  Steel  Company  and  the  Tennessee  Coal,  Iron  and  Rail- 
road Company. 

Summarizing  for  the  raw  materials,  it  appears  that  the  Steel 
Corporation  held  its  own  fairly  well,  though  its  favorable  show- 
ing resulted  in  part  from  the  purchase  of  important  competitors. 

The  best  single  index  as  to  the  Steel  Corporation's  position  in 
the  steel  manufacturing  industry  is  the  output  of  ingots  and 
castings.  In  1901  the  Corporation  produced  66.3  per  cent  of  the 
country's  output  of  these  products,  but  in  each  succeeding  year 
it  lost  ground  relatively  until  by  1910  it  produced  only  54.7  per 
cent.  And  this  decline  came  in  spite  of  the  purchase  of  impor- 
tant competitors.  To  be  sure,  the  Corporation's  total  output 
of  ingots  and  castings  has  increased  enormously  since  1901.  In 
1901  it  produced  only  8,854,820  tons;  in  1910,  14,179,369  tons. 
That  the  company,  despite  this  growth,  did  not  hold  its  own  is 
due,  of  course,  to  the  even  more  rapid  growth  of  its  competitors. 
While  the  trust  did  60  per  cent  more  business  in  ingots  and  cast- 
ings in  1910  than  in  1901,  its  competitors  did  154  per  cent  more. 
This,  moreover,  can  not  be  explained  by  saying  that  a  large 
concern  finds  it  more  difl5cult  to  increase  its  business  at  the 
same  rate  as  its  smaller  competitors,  for  the  competitors  of  the 
Steel  Corporation  not  only  grew  at  a  faster  rate,  but  in  the 
aggregate  showed  an  absolute  increase  in  business  greater  than 
that  secured  by  the  Steel  Corporation,  including,  as  the  latter 


2l6       THE  TRUST  PROBLEM  IN  THE  UNITED    STATES 

does,  the  Carnegie  Company,  easily  the  most  efficient  of  the  steel 
companies  prior  to  its  incorporation  in  the  trust. ^  Though  the 
Steel  Corporation  was  not  able  to  increase  its  output  as  rapidly 
as  its  competitors,  nevertheless  it  produced  vastly  more  than  its 
nearest  competitor  in  point  of  size.  In  191 1  the  steel  ingot 
production  of  the  Corporation  was  16,856,914  gross  tons  (55.6 
per  cent  of  the  country's  output),  while  the  largest  independent 
concern — ^Jones  and  LaughHn — produced  only  1,690,845  tons,  or 
5.5  per  cent." 

With  respect  to  the  rolled  products,  taking  them  as  a  whole, 
the  Steel  Corporation  substantially  maintained  its  position.  In 
1901  it  produced  50.1  per  cent  of  the  total  output  of  rolled 
products;  in  1910,  48.1  per  cent.  In  individual  lines,  however, 
the  Steel  Corporation  lost  heavily.  In  190 1  it  produced  62.2  per 
cent  of  the  structural  shapes;  in  1910,  only  51.3  percent  (the  Steel 
Corporation's  output  of  structural  shapes  between  1901  and  1910 
increased  85  per  cent;  that  of  its  competitors  188  per  cent).  In 
1901  the  Steel  Corporation  made  64.6  per  cent  of  the  plates  and 
sheets;  in  1910,  only  48.0  per  cent  (the  Steel  Corporation  in- 
creased its  output  66  per  cent  between  1901  and  1910;  the  inde- 
pendents increased  their  output  223  per  cent).  In  190 1  the 
Steel  Corporation  turned  out  77.6  per  cent  of  the  wire  rods;  in 
1910,  only  67.3  per  cent  (for  the  Steel  Corporation  this  repre- 
sented an  increase  of  42  per  cent;  for  its  competitors,  an  increase 
of  139  per  cent).  In  1901  the  Steel  Corporation's  output  of  wire 
nails  was  65.8  per  cent  of  the  total;  in  1910,  only  55.4  per  cent 
(between  1901  and  1910  the  Corporation's  output  increased  but 
9  per  cent;  that  of  its  competitors,  69  per  cent). 

The  maintenance  by  the  Corporation  of  its  position  in  rolled 
products  as  a  whole,  despite  the  decrease  in  these  individual 
lines,  seems  to  have  resulted  from  an  increase  in  the  production 
of  bars,  skelp,  etc.,  and  from  the  production  in  1908  to  1910  of  a 
large   proportion   of    the    open-hearth    rails,    the    Corporation 

»  The  Steel  Corporation's  output  of  ingots  and  castings  increased  between 
1901  and  1910  by  5,300,000  tons;  that  of  its  competitors  by  7,200,000  tons. 
Report  of  the  Commissioner  of  Corporations,  part  I,  pp.  360-363. 

2  Brief  for  the  United  States  (no.  481),  vol.  I,  p.  152. 


THE  UNITED  STATES  STEEL  CORPORATION  21^ 

having  produced  none  at  all  prior  to  1908.  With  respect  to 
Bessemer  rails,  the  Corporation  produced  59.9  per  cent  of  the 
country's  output  in  1901,  and  though  there  were  ups  and  downs 
in  the  years  that  followed,  it  produced  in  19 10  almost  exactly 
the  same  percentage.  In  the  maintenance  of  this  position  the 
Corporation  was  greatly  aided  by  its  railroad  afBliations.  In 
191 1,  for  example,  one  or  more  directors  of  the  Corporation  was 
to  be  found  on  the  directorate  of  sixty-two  American  railroads, 
possessing  a  mileage  equal  to  almost  half  that  of  the  whole 
country.^  It  would  be  strange,  indeed,  if  these  connections  did 
not  bring  the  Steel  Corporation  some  business  which  otherwise 
would  have  gone  to  the  independent  rail  manufacturers. 

It  is  evident  that  the  high  degree  of  control  which  the  Steel 
Corporation  had  at  the  time  of  its  organization  was  being  grad- 
ually lost.  Even  in  the  lines  in  which  it  had  a  quasi-monopolis- 
tic position  in  1910,  it  had  lost  heavily,  almost  without  excep- 
tion. This  decline  had  taken  place,  moreover,  in  spite  of  the 
diversity  of  the  businesses  into  which  the  influence  of  the  Steel 
Corporation  ramified.  From  its  organization  the  officers  or  di- 
rectors of  the  company  were  at  various  times  on  the  directorate 
of  a  vast  number  of  industrial  companies.  The  Steel  Corpora- 
tion's connections  with  industrial  companies  and  railroads,  all 
large  buyers  of  iron  and  steel,  naturally  attracted  to  it  a  great 
deal  of  business.  Furthermore,  the  Corporation  had  powerful 
moneyed  connections.  At  some  time  after  its  organization  it 
had  directors  on  as  many  as  eighty-five  different  banks  and 
trust  companies,  and  twenty-five  insurance  companies.^  In 
addition,  according  to  Mr.  Gary,  it  made  a  practice  of  keeping 
about  seventy-five  million  dollars  in  cash  on  deposit  in  banks.^ 
The  government  in  its  petition  went  so  far  as  to  charge  that  the 
Corporation  had  built  up  ''a  system  of  interlacing  of  directorates 

1  Brief  for  the  United  States  (no.  6214),  part  II,  p.  287. 

2  Ibid. 

3  Senate  Report  no.  1326,  62nd  Cong.,  3rd  Sess.,  p.  824.  On  December 
31,  1913,  none  of  the  competitors  of  the  Corporation  had  a  capitalization 
equal  to  the  amount  of  cash  held  by  the  Steel  Corporation.  Brief  for  the 
United  States  (no.  481),  vol.  I,  p.  138. 


2lS       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

which  embraced  ahnost  the  entire  commercial  and  financial 
powers  of  the  country.^ 

While  the  fact  of  the  decline  in  the  relative  importance  of  the 
Steel  Corporation  is  clear,  the  explanation  thereof  is  not  so 
clear.  Possibly  those  in  charge  of  the  Corporation,  fearing 
dissolution  proceedings,  did  not  attempt  to  retain  their  original 
degree  of  control  of  the  steel  business  of  the  country.  The 
decision  of  the  Circuit  Court  refusing  to  enter  a  dissolution 
decree  because  the  Steel  Corporation  had  not  been  able  to  hold 
its  own  would  appear  to  justify  such  a  policy.  On  the  other 
hand,  not  until  after  1910  were  any  of  the  great  trusts  dissolved, 
and  it  is  therefore  doubtful  whether  fear  of  the  law  provides  the 
real  explanation.  Possibly,  to  give  another  explanation,  the 
guiding  spirits  of  the  Steel  Corporation  preferred  to  maintain 
the  prices  of  iron  and  steel  products,— even  at  the  loss  of  a  pro- 
portionate share  in  the  country's  growing  business, — as  a  means 
of  squeezing  out  the  water  from  the  company's  stock,  and  of 
putting  it  on  a  more  secure  foundation.  In  support  of  this  view 
it  may  be  said  that  during  periods  of  industrial  depression  the 
proportion  of  the  Corporation's  output  to  the  total  was  gener- 
ally smaller  than  its  proportion  of  capacity,  owing  to  its  policy 
of  maintaining  prices.  Thirdly,  perhaps  the  true  explanation 
is  the  absence  of  any  important  economies  in  the  trust  form  of 
organization;  the  sceptic  would  seem  to  find  here  ground  for  his 
scepticism.^ 

ip.  62. 

2  There  is  much  testimony  as  to  the  ability  of  the  Steel  Corporation  to 
eliminate  its  competitors.  Most  of  the  witnesses  in  the  government  suit 
agreed  that  the  cost  of  converting  the  raw  materials  into  the  finished  prod- 
ucts (conversion  cost)  was  practically  the  same  for  the  Steel  Corporation  as 
for  the  leading  independent  concerns.  Mr.  Donner,  president  of  the  Cam- 
bria Steel  Company,  and  formerly  a  director  of  the  American  Tin  Plate  Com- 
pany, testified  that  in  his  opinion  the  Steel  Corporation  could  not  put  its 
competitors  out  of  business  "without  committing  suicide,"  that  if  the  Cor- 
poration were  to  make  prices  so  low  that  there  was  no  profit  for  the  Cambria 
concern,  there  would  be  nothing  left  for  the  Corporation.  (Brief  for 
the  United  States,  no.  481,  vol.  II,  Summary  of  Evidence,  p.  855.) 
A  mill  with  a  capacity  of  40,000  to  50,000  tons  of  ingots  per  month, 
if  properly   designed   and    operated,   ought,   he    said,    to   compete  with 


THE  UNITED  STATES  STEEL  CORPORATION  219 

Even  in  the  absence  of  important  economies,  however,  a  trust 
might  hold  its  own,  could  it  avail  itself  of  certain  props  to  main- 
tain its  position.  The  Standard  Oil  Company,  as  we  have  seen, 
found  its  main  strength  in  certain  objectionable  features,  such 
as  rebates,  control  of  pipe-lines,  and  unfair  selling  methods.    Had 

the   Corporation  in    any  of    its   plants.     (Ibid.,   p.    868.)    Mr.    Schwab, 
president  of   the   Bethlehem   Steel   Company   and   formerly  president   of 
the  Corporation  itself,  testified  that  the  mill  cost  of  the  Corporation  at  Pitts- 
burg or  Gary  did  not  differ  materially  from  the  mill  cost  at  Bethlehem; 
that  the  limit  of  metallurgical  and  mechanical  possibilities  had  been  reached, 
and  that  the  conversion  cost  in  all  mills  throughout  the  United  States  was 
practically  uniform.    (Ibid.,  p.  868.)    Mr.  Corey,  formerly  president  of  the 
Corporation,  declared  that  the  cost  of  production  at  the  Carnegie  works  was 
never  materially  less  after  the  formation  of  the  Corporation  than  it  had  been 
in  1901,  at  the  time  the  Carnegie  works  were  acquired.     (Ibid.,  p.  869.) 
Mr.  Farrell,  then  president  of  the  Corporation,  enumerated  fourteen  different 
steel  companies  which  the  Corporation  could  not  put  out  of  business  without 
committing  financial  suicide.    (Ibid.,  p.  859.)     (Whatever  may  be  the  verdict 
with  respect  to  the  leading  independent  concerns,  it  is  much  to  be  doubted, 
Mr.  Farrell  to  the  contrary  notwithstanding,  whether  some  of  these  fourteen 
companies,  such  as  the  Wheeling  Steel  and  Iron  Company— with  a  steel  ingot 
output  of  less  than  i  per  cent  of  that  of  the  Corporation — produced  on 
large  enough  scale  to  compete  effectively  with  the  Corporation.)     On  the 
other  hand,  Mr.  Campbell,  president  of  the  Youngstown  Sheet  and  Tube 
Company,  when  asked  whether,  taking  into  account  the  extent  of  the  ore 
holdings  of  the  Corporation,  its  ownership  of  railroads,  the  extent  of  its 
capitalization,  the  character  of  men  interested  in  it  and  their  relations  to 
banking  circles  and  railroads,  the  Corporation  had  the  power  to  put  its 
competitors  out  of  business,  replied,  "I  think  they  would  have  the  power; 
yes,  sir  ...  I  think  if  Judge  Gary  would  happen  to  die  to-night  that  there 
would  be  a  good  many  steel  people  that  would  lie  awake  until  his  successor 
was  appointed.    (Ibid.,  pp.  850-851.)    Mr.  Schwab  testified  that  it  cost  his 
company  more  to  make  steel  rails  than  it  did  the  Corporation,  because  his 
company  did  not  transport  its  own  ore.    (Ibid.,  p.  868.)  Judge  Gary,  the  real 
head  of  the  Steel  Corporation,  testified  in  1908  that  the  Corporation  could 
produce  pig  iron  cheaper  than  its  competitors;  that  although  the  mill  costs  of 
production  were  about  the  same  for  the  Corporation  as  for  some  of  the  other 
companies,  yet  by  reason  of  the  control  of  the  best  ores  the  Corporation  could 
undersell  them.    (Ibid.,  p.  868.)    The  conclusion  would  seem  to  be  that  the 
Corporation  by  virtue  of  its  ownership  of  the  cream  of  the  ore  and  coking 
coal  lands  and  of  the  iron  ore  railroads  (not  to  mention  its  financial  connec- 
tions) had  an  advantage  over  its  competitors,  but  that  this  advantage  did  not 
demonstrate  the  superior  economy  of  the  trust  form  of  organization.    Rather 


220       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  ofl&cials  of  the  Steel  Corporation  been  so  minded,  or  did  the 
nature  of  the  business  permit,  the  Steel  Corporation  might 
have  followed  a  similar  policy.  But  such  has  not  been  the  case. 
In  the  first  place,  the  Steel  Corporation  was  not  the  recipient  of 
rebates  from  the  railroads.  Mr.  James  R.  Garfield  testified  in 
the  steel  dissolution  case  that  he  made  an  investigation  of  the 
relations  of  the  railways  to  the  Steel  Corporation  similar  to  the 
investigation  made  into  the  oil  business,  and  he  found  no  evi- 
dence of  the  Steel  Corporation  having  received  any  rebates.^ 
Judge  Woolley,  of  the  District  Court,  stated  that  there  was 
nothing  in  the  evidence  that  suggested  that  the  Steel  Corporation 
used  its  power  as  a  means  of  securing  rebates;  on  the  contrary 
it  appeared  that  early  in  its  history  the  Corporation  promul- 
gated a  rule  against  soliciting  and  accepting  rebates.-  The 
contrast  in  this  respect  with  the  Standard  Oil  Company  is  note- 
worthy. The  Steel  Corporation,  with  its  iron  ore  railroads, 
has  not,  it  is  true,  lived  up  to  its  obligations  as  a  common  carrier, 
but  the  iron  ore  railroads  cut  by  no  means  the  same  figure  in  this 
industry  as  do  the  crude  oil  pipe-lines  in  the  oil  industry.  More- 
over, the  Steel  Corporation  did  not  endeavor  to  coerce  dealers 
or  consumers  into  dealing  with  it  exclusively.^  Neither  did 
it  resort  to  local  price  cutting  as  a  means  of  restraining  competi- 
tive business.  Whether  it  would  have  done  so  had  circumstances 
permitted  can  not  be  said;  the  conditions,  as  a  matter  of  fact, 
did  not  permit.  On  this  point  the  Circuit  Court  said:  "Under 
conditions  incident  to  the  steel  trade  the  power  of  a  large  com- 
pany to  carry  on  a  ruinous  trade  war  against  any  particular 
competitor  does  not  exist  in  the  iron  and  steel  industry.  The 
customers  of  the  great  steel  companies  are  large  jobbers  and  the 
purchasing  agents  of  other  companies,  who  are  in  the  closest 

it  demonstrated  the  many-sidedness  of  the  trust  problem  and  the  inability 
to  achieve  results  in  the  way  of  restoring  competition  except  by  the  adoption 
of  a  legislative  policy  that  takes  into  account  the  many  favoring  favors  that 
lie  at  the  basis  of  the  apparent  success  achieved  by  some  trusts. 

'  Brief  for  the  Steel  Corporation  (no.  481),  p.  119. 

2  223  Fed.  Rep.  171.  See  also  Brief  for  the  Steel  Corporation  (no.  481), 
pp.  I 19-120. 

'  Brief  for  the  Steel  Corporation  (no.  481),  p.  126. 


THE  UNITED  STATES  STEEL  CORPORATION  221 

touch  with  every  fluctuation  of  the  steel  market.  The  result  is 
that  any  effort  on  the  part  of  any  one  of  these  great  steel  com- 
panies to  inaugurate  a  trade  war  by  ruinously  underseUing  a 
competitor  would  at  once,  owing  to  the  sensitiveness  and  inter- 
related character  of  the  steel  market,  result  in  forcing  the  com- 
pany that  was  thus  ruinously  selling  in  any  particular  market  or 
locality  to  in  the  same  way  ruinously  lower  its  prices  in  every 
other  community."  ^  The  Steel  Corporation  therefore  could  not 
wage  a  localized  warfare  against  its  competitors.  It  could,  of 
course,  have  reduced  the  prices  of  articles  made  by  certain 
competitors  without  reducing  the  prices  of  the  articles  not  made 
by  these  competitors,  and  in  this  way  have  subjected  these 
particular  competitors  to  cutthroat  competition.  But  this  policy 
was  not  followed.  It  could  also  have  cut  prices  to  the  bone 
everywhere,  yet  according  to  the  president  of  the  Cambria  Steel 
Company  this  would  have  amounted  to  an  act  of  suicide.  The 
testimony  is  ample  that  the  competition  of  the  Steel  Corporation, 
though  vigorous,  was  fair,  and  conspicuously  free  from  the 
brutality  of  which  some  other  trusts  have  been  found  guilty.^ 
The  tariff,  it  is  true,  played  its  part.  The  iron  and  steel  industry 
has  been  a  notable  recipient  of  tariff  favors,  and  the  combina- 
tions and  trusts  in  this  industry  (notably  the  tin  plate  trust) 
have  profited  thereby.  In  fact,  some  of  the  trusts  of  the  late 
nineties  would  perhaps  never  have  been  formed  had  it  not  been  for 
the  tariff  wall,  well-nigh  insurmountable  to  foreign  competitors. 
But  certainly  the  tariff  was  not  the  mother  of  the  steel  trust  of 
igoi;  by  that  time  the  duty  had  become  nominal.  After  the 
removal  of  the  duties  from  iron  and  steel  products  by  the  Sim- 
mons-Underwood bill  of  1913,  the  Steel  Corporation  for  the  most 
part  stood  on  its  own  feet,  unsupported  by  legislative  props,^ 
save,  of  course,  such  artificial  support  as  was  involved  in  the 

1  223  Fed.  Rep.  77. 

^  On  this  point,  see  the  testimony  of  competitors  abstracted  in  the  Brief  for 
the  Steel  Corporation  (no.  481),  pp.  122-124. 

^  Not  all  iron  and  steel  products  were  placed  on  the  free  list.  Thus,  the 
duty  on  tubes  and  pipes  was  made  20  per  cent  ad  valorem;  on  tin  plate  15  per 
cent;  and  on  structural  shapes  10  per  cent.  Taussig,  Tariff  History  of  the 
United  States  (6th  edition),  p.  441. 


222        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

failure  of  the  government  to  prevent  the  Corporation  from 
acquiring  a  semi-monopoly  of  the  best  iron  ore  deposits,  and  from 
utilizing  its  iron  ore  railroads  to  the  detriment  of  its  competitors, 
— subjects  to  which  we  now  turn. 

In  view  of  the  fact  that  the  Steel  Corporation  was  losing  its 
hold  on  the  industry,  one  might  have  concluded  that  the  wise 
public  policy  would  have  been  that  of  "watchful  waiting,"  that 
the  steel  trust  in  time  would  disintegrate  by  virtue  of  its  very 
unwieldiness.  This  may  prove  to  be  the  outcome,  yet  it  must 
be  remembered  that  the  Steel  Corporation  is  unusually  well 
intrenched  in  the  matter  of  the  essential  natural  resources.  The 
important  elements  which  go  into  the  manufacture  of  pig  iron 
(the  foundation  of  the  steel  manufacture)  are  iron  ore,  coking 
coal,  and  lunestone.  Of  these  the  iron  ore  is  the  most  important, 
and  the  Steel  Corporation  in  191 1,  when  the  Report  of  the 
Commissioner  of  Corporations  was  published,  held  approxi- 
mately 75  per  cent  of  all  the  commercially  available  iron  ore  of 
the  Lake  Superior  district,  the  ore  of  this  district  being  the  basis 
of  the  iron  and  steel  industry  of  the  country.^  (About  85 
per  cent  of  the  country's  output  of  iron  ore  came  at  that 
time  from  the  Lake  Superior  district.)  In  addition,  the  Steel 
Corporation  owned  immense  deposits  of  iron  ore  in  the  South 
and  in  other  sections,  even  including  deposits  in  Cuba.  Mr. 
Gary,  the  chairman  of  the  Steel  Corporation,  admitted  in  his 
testimony  before  the  House  Ways  and  Means  Committee  in 
1908  that  the  Corporation  practically  controlled  the  ultimate  ore 
supply  of  the  country.^ 

The  testimony  of  Mr.  Schwab  before  the  Stanley  Committee 
is  also  significant.  Mr.  Schwab  gave  it  as  his  opinion  that  there 
would  not  be  any  great  development  in  the  iron  and  steel  busi- 
ness by  new  enterprises,  because  of  the  difficulty  of  securing  a 
sufficiently  large  supply  of  raw  material.  Only  a  concern  possess- 
ing a  large  reserve  of  ore  could  afford  to  make  the  large  invest- 
ment required  to  produce  iron  and  steel  economically,  and  the 

1  Report  of  the  Commissioner  of  Corporations,  part  I,  p.  59. 

2  House  Document  no.  1505,  60th  Cong.,  2nd  Sess.,  p.  1752. 


THE  UNITED  STATES  STEEL  CORPORATION  223 

greater  part  of  the  ore  on  this  continent  was  already  owned  or 
leased  by  existing  companies.^ 

The  dominating  position  of  the  Steel  Corporation  in  the  ore 
industry  was  heightened  through  its  ownership  of  iron  ore  rail- 
roads. The  Steel  Corporation  owned  the  Duluth  and  Iron 
Range,  and  the  Duluth,  Missabe  and  Northern,  the  two  most 
important  ore  roads  in  the  Lake  Superior  region.''  The  freight 
rates  charged  by  these  roads  were  very  high,  their  operating 
expenses  were  very  low  (the  operating  ratio  in  1910  was  36.5  per 
cent  for  one  and  below  30  per  cent  for  the  other,  against  an 
average  of  66  per  cent  for  the  whole  country) ;  and  as  a  result 
these  ore  roads  were  immensely  profitable.^  In  191 1  a  con- 
siderable reduction  in  the  rates  on  iron  ore  was  made  by  the 
carriers,  but,  according  to  the  Commissioner  of  Corporations, 
they  were  still  excessive.''  These  high  rates  not  only  contributed 
greatly  to  the  enormous  earnings  of  the  Steel  Corporation,  but 
they  imposed  a  burden  on  such  of  its  competitors  as  were  obliged 
to  ship  their  ore  over  these  roads, — for  none  of  the  competitors 
of  the  Corporation  owned  any  railroads  carrying  iron  ore  from 
the  ore  fields  to  the  Lake  ports.  This  situation  would  seem  to 
have  called  for  the  application  of  the  principle  of  the  commodity 
clause;  the  interests  of  the  public  would  seem  to  have  required 
that  the  Steel  Corporation  divest  itself  of  its  iron  ore  railroads, 
and  thus  remove  the  inducement  which  they  had  to  restrain  the 
independent  operations  by  means  of  excessive  freight  rates  and 
discrimination  in  service. 

After  the  report  of  the  Bureau  of  Corporations  was  published, 
the  Steel  Corporation  cancelled  the  lease  it  held  of  the  valuable 
ore  lands  of  the  Great  Northern  Railway  system.  This  lease  had 
been  made  in  1907  in  order  to  prevent  any  one  else  making  use 
of  these  ore  lands  (the  unusually  high  rate  of  royalty  leads  to 

^  Brief  for  the  United  States  (no.  6214),  part  I,  p.  390. 

*  These  two  roads  handled  about  two-thirds  of  the  total  ore  traffic  of  the 
Lake  Superior  district.  Brief  for  the  United  States  (no.  481),  vol.  I,  pp. 
161-162. 

*  Report  of  the  Commissioner  of  Corporations,  part  I,  pp.  374-375. 
*Ibid.,  part  III,  p.  506.    A  further  reduction  was  ordered  in  1915  by  the 

Interstate  Commerce  Commission.    33  I,  C.  C.  Reports  541. 


224        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

this  conclusion).^  It  was  provided  that  the  lease  might  be  can- 
celled by  the  Steel  Corporation  on  January  i,  1915,  upon  giving 
two  years'  notice.  On  October  17,  1911,  the  Finance  Committee 
of  the  Steel  Corporation,  influenced  possibly  by  the  prospect  of 
the  filing  of  a  government  bill — one  was  filed  on  October  26 — 
decided  to  cancel  the  lease  on  January  i,  1915.^  This  action 
opened  up  a  large  supply  of  excellent  ore,  which  might  be  made 
use  of  by  independent  operations. 

But  of  more  importance  as  bearing  on  the  ability  of  the  Steel 
Corporation  to  effect  a  monopoly  because  of  a  control  of  the  iron 
ore  is  the  fact  that  the  high  class  Lake  Superior  ores  owned  by 
the  Steel  Corporation  have  become  less  and  less  the  basis  of  the 
steel  industry.  New  fields  were  developed,  and  ores  which  a  few 
years  ago  were  regarded  as  unusable  can  now  be  worked  under 
the  improved  methods  in  vogue.  The  Bethlehem  Steel  Com- 
pany, for  example,  gets  its  iron  ore  from  the  Adirondack  moun- 
tains in  New  York,  from  Sweden,  Chili,  and  Cuba.^  This 
company  and  other  tidewater  concerns  became  entirely  inde- 
pendent of  Lake  Superior  ore,  and  after  the  passage  of  the 
Simmons-Underwood  bill  were  not  hampered  by  a  duty  on 
foreign  ore.  The  Colorado  Fuel  and  Iron  Company  has  its  ore  in 
Wyoming,  New  Mexico,  and  Utah;  and  is  also  independent  of 
Lake  Superior  ore.  Present  indications,  therefore,  are  that  the 
establishment  of  a  trust  based  on  control  of  the  iron  ore  will 
prove  futile  because  of  new  discoveries  and  improved  methods.^ 
And  such  may  in  other  industries  frequently  prove  to  be  the 
case.  But  certainly  this  will  not  be  true  of  all  industries,  and 
therefore  a  definite,  farsighted  policy  with  respect  to  our  natural 
resources  would  seem  to  be  but  the  part  of  wisdom. 

'  For  an  opposing  view,  see  Brief  for  the  Steel  Corporation  (no.  481), 
p.  168. 

*  Brief  for  the  United  States  (no.  6214),  part  II,  pp.  66,  80. 

'  Moreover,  new  deposits  in  the  Lake  Superior  district  were  discovered, 
thus  reducing  the  Corporation's  percentage  of  the  total.  See  Brief  for  the 
Steel  Corporation  (no.  481),  pp.  32-33. 

''  According  to  the  Steel  Corporation  its  ore  holdings  in  the  Lake  Superior 
district  amount  to  less  than  45.6  per  cent  of  the  known  and  developed 
ores  of  the  first  quality.    Brief  for  the  Steel  Corporation  (no.  481),  p.  291. 


THE  UNITED  STATES  STEEL  CORPORATION  225 

The  foregoing  considerations,  however,  relate  to  the  future. 
Competition  in  production  continues  quite  active,  and  the 
independents  are  steadily  growing  in  strength  and  importance. 
Yet  this  competition  has  not  made  itself  felt  fully  with  respect 
to  prices;  competition  in  prices  has  been  materially  restrained  by 
various  means, — pools,  trade  meetings,  and  dinners.*  At  the 
time  of  the  organization  of  the  Steel  Corporation  and  for  several 
years  thereafter  a  number  of  the  constituent  companies  of  the 
Corporation  allotted  trade  and  fixed  prices  by  means  of  pooling 
agreements.^  In  the  year  1904  the  president  of  the  Corporation 
ordered  the  subsidiaries  to  withdraw  from  these  pools.  Never- 
theless shortly  thereafter  representatives  of  the  same  concerns 
that  had  been  parties  to  the  pools  held  trade  meetings,  and  at 
these  meetings  there  were  reached  understandings  with  respect 
to  prices  by  means  of  which  the  price  level  was  maintained  as 
effectually  as  under  the  agreements.^  The  legality  of  these 
meetings  was  questioned,  and  in  1907  they  were  abandoned.^ 
They  were  soon  followed,  however,  by  the  famous  Gary  dinners, 
— another  device  for  substituting  cooperation  for  competition 
as  a  regulator  of  prices. 

The  first  of  these  dinners  was  held  in  New  York  City  on  No- 
vember 20,  1907.^  The  panic  of  October,  1907,  had  demoralized 
the  steel  trade,  and  the  dinner  was  held  to  discuss  the  proper 
method  of  handling  the  situation.  There  were  present  a  number 
of  manufacturers  of  iron  and  steel,  controlling  among  them  at 
least  90  per  cent  of  the  trade.^  Mr.  Gary,  in  his  testimony  in  the 
government  suit,  explained  the  reason  for  holding  the  dinner. 
"My  purpose  was  ...  to  prevent  the  demoralization  of  busi- 
ness, to  maintain  so  far  as  practicable  the  stability  of  business 

^  Tables  showing  the  prices  of  iron  and  steel  products  from  1895-1913  may 
be  found  in  Brief  for  the  United  States  (no.  481),  vol.  II,  pp.  1037-1085. 

2  223  Fed.  Rep.  173.  See  also  Brief  for  the  Steel  Corporation  (no.  481), 
p.  208. 

'223  Fed.  Rep.  173. 

■*Ibid.  According  to  the  Brief  for  the  Steel  Corporation  (no.  481), 
p.  219,  they  were  abandoned  in  October,  1906. 

^  Brief  for  the  United  States  (no.  6214),  part  II,  p.  146. 

^Ibid.,  p.  147. 


2  26  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

and  to  prevent,  if  I  could,  not  by  agreement,  but  by  exhortation, 
the  wide  and  sudden  fluctuation  of  prices  which  would  be  in- 
jurious to  everyone  interested  in  the  business  of  the  iron  and 
steel  manufacturers."  ^ 

This  ''exhortation"  to  his  fellow-manufacturers  was  supported 
by  an  elaborate  scheme  for  controlling  prices.  As  a  result  of  the 
dinner  a  general  Advisory  Committee  of  five  members  was 
appointed,  Mr.  Gary  being  chairman."  This  committee  was 
empowered  to  appoint  sub-committees;  and  it  did  appoint  nine 
such  committees,  one  on  ore  and  pig  iron,  another  on  rails  and 
billets,  and  so  on.  The  Steel  Corporation  was  well  represented 
on  these  committees,  having  two  representatives  on  the  General 
Committee,  and  one  representative  on  each  of  the  nine  sub- 
committees.^ The  sub-committees  held  meetings  in  various 
parts  of  the  country  with  more  or  less  regularity  for  several 
months.  The  president  of  the  Youngstown  Sheet  and  Tube 
Company  was  made  a  member  of  the  sub-committee  on  sheets 
and  plates.  He  testified  in  the  government  suit  that  shortly  after 
the  dinner  of  November  20,  1907,  he  attended  a  meeting  in 
Pittsburg  of  the  manufacturers  of  tin  plate  and  sheet  steel,  at 
which  there  were  present  90  per  cent  of  the  manufacturers  of 
sheet  steel;  that  this  meeting  was  an  outgrowth  of  the  first  Gary 
dinner;  and  that  at  this  meeting  each  manufacturer  was  ques- 
tioned in  regard  to  his  percentage  of  the  business,  and  his  mill 
operations.'*  When  the  maintenance  of  the  market  prices  was 
discussed,  what  was  in  mind  was  the  prices  published  by  the 
subsidiaries  of  the  Steel  Corporation.  He  further  testified  that, 
when  he  was  chairman  of  a  sub-committee  meeting,  he  would  ask 
those  present  to  state  whether  they  thought  the  price  was  too 
high,  or  whether  it  was  too  low,  and  that,  when  a  consensus  of 
opinion  had  been  reached,  he  would  call  on  each  one  to  state 
what  policy  he  would  follow  with  respect  to  prices.^  He  made  it 
clear  to  the  members  that  agreements  were  illegal;  and  that  there 
would  be  no  agreement,  no  penalties,  and  no  restriction  of  out- 

*  Brief  for  the  United  States  (no.  6214),  part  II,  p.  149. 

'^Ibid.,  p.  147.  ''Ibid.,  p.  151. 

^Ibid.,  p   150.  6  Ibid.,  p.  152. 


THE  UNITED  STATES  STEEL  CORPORATION  227 

put.  But  in  response  to  inquiry  from  the  government  examiner 
he  stated  that  he  thought  that  there  was  a  general  understand- 
ing "that  their  poHcy  would  be  to  market  their  product  at  the 
then  prevailing  price  until  they  notified  their  competitors  that 
they  wanted  to  change  their  price."  ^  The  witness  also  attended 
the  meetings  of  the  tube  manufacturers  and  of  the  manufacturers 
of  billets  and  sheet  bars,  and  they  were  conducted  on  substan- 
tially the  same  basis.  The  president  of  the  McKeesport  Tin 
Plate  Company  admitted  that  the  effect  of  the  meetings  was  to 
maintain  a  steady  price,  and  that  after  prices  were  announced  he 
would  feel  under  a  moral  obligation  to  sell  at  that  price  until  he 
notified  his  competitors  of  an  intention  to  change.^  Much 
additional  testimony  might  be  cited;  but  the  following  excerpt 
from  the  testimony  of  the  president  of  the  Steel  Corporation 
from  1903  to  December  31,  1910,  will  suffice: 

"Q.  State  whether  or  not  it  was  the  purpose,  in  the  creation 
of  these  sub-committees  to  reach  a  general  understanding  as  to 
prices  of  iron  and  steel  products  and  to  bring  about  the  main- 
tenance of  them. 

The  Witness.  Yes. 

Q.  Were  there  understandings  as  to  what  those  prices  would 
be? 

The  Witness.  There  were. 

Q.  Were  the  prices  maintained  or  not  as  a  result  of  those 
understandings? 

The  Witness.  They  were."  ^ 

It  seems  clear  that  through  the  General  Committee  and  the 
sub-committees  the  manufacturers  of  steel  cooperated,  not  only 
in  maintaining  the  market  price,  but  also  in  making  the  market 
price  identical  with  that  quoted  by  the  subsidiaries  of  the  Steel 
Corporation. 

In  February,  1909,  this  policy  of  cooperation  was  temporarily 
abandoned.  Business  had  so  declined  in  volume  that  the  inde- 
pendents refused  to  abide  by  the  "understandings,"  and  sold  at 

^  Brief  for  the  United  States  (no.  6214),  part  II,  p.  153. 
2  Ibid.,  p.  168. 
'Ibid.,  pp.  168-169. 


228        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

prices  determined  by  themselves.^  The  Steel  Corporation 
attempted  for  a  time  to  maintain  prices  by  itself,  but  soon  aban- 
doned the  attempt,  and  estabhshed  an  open  market  in  steel 
products,  except  in  rails."  In  October,  1909,  the  meetings  of  the 
steel  manufacturers  at  luncheons  and  dinners  were  resumed,  and 
the  result  was  the  restoration  of  the  policy  of  cooperation.^  In 
the  fall  of  1910  and  the  early  part  of  191 1  there  were  further 
meetings  of  the  officials  of  the  Steel  Corporation  with  the  other 
steel  manufacturers. 

Fortunately  the  speeches  made  at  the  dinner  of  January  11, 
191 1,  hav^e  been  preserved,  and  these  clearly  show  the  workings 
of  the  Gary  dinners.    In  his  speech  Mr.  Gary  said  in  part: 

"We  have  something  better  to  guide  and  control  us  in  our 
business  methods  than  a  contract  which  depends  upon  written 
or  verbal  promises  with  a  penalty  attached.  We,  as  men,  as 
gentlemen,  as  friends,  as  neighbors,  having  been  in  close  com- 
munication and  contact  during  the  last  few  years,  have  reached 
a  point  where  we  entertain  for  one  another  respect  and  affec- 
tionate regard.  We  have  reached  a  position  so  high  in  our  lines 
of  activity  that  we  are  bound  to  protect  one  another;  and  when  a 
man  reaches  a  position  where  his  honor  is  at  stake,  where  even 
more  than  life  itself  is  concerned,  where  he  can  not  act  or  fail  to 
act  except  with  a  distinct  and  clear  understanding  that  his  honor 
is  involved,  then  he  has  reached  a  position  that  is  more  binding 
on  him  than  any  written  or  verbal  contract."  ^ 

In  his  speech  Mr.  Gary  further  said  that  in  his  opinion  it 
would  be  a  mistake  to  reduce  prices  at  that  time.  At  this  same 
dinner  a  representative  of  Jones  and  Laughlin  said  in  part,  "I 
hope  it  will  be  the  consensus  of  opinion  here  to-night  that  we  will 
maintain  the  present  prices."  ^  The  president  of  the  Ashland 
Steel  Company  said  that  so  far  as  his  company  was  concerned, 
"we  are  ready  and  willing  to  still  cooperate  to  do  what  we  can  to 

*  223  Fed.  Rep.  175. 

2  Brief  for  the  United  States  (no.  6214),  part  II,  p.  200. 
'  Ibid.,  p.  207. 

*  Ibid.,  (no.  481),  vol.  II,  pp.  989-990. 

*  Ibid.,  p.  993, 


THE  UNITED  STATES  STEEL  CORPORATION  229 

maintain  prices."  ^  Mr.  Gary,  during  the  course  of  the  dinner, 
called  on  practically  all  of  the  leading  steel  manufacturers,  and 
each,  almost  without  exception,  expressed  himself  as  in  favor  of 
maintaining  the  existing  prices,  or  as  ready  to  support  the 
cooperative  movement  with  respect  to  prices. 

Whether  as  a  result  of  the  investigation  of  the  Stanley  Com- 
mittee of  the  House  of  Representatives  or  in  anticipation  of  the 
government  suit,  the  Gary  dinners  came  to  an  end  in  191 1,  and 
judging  from  the  movement  of  prices,  the  cooperative  arrange- 
ment was  given  up.  With  respect  to  these  dinners  the  Stanley 
Committee  said: 

"We  think  the  conclusion  is  irresistible  that  the  Gary  dinners 
were  instituted  as  a  means  of  conveying  to  the  entire  iron  and 
steel  industry  information  as  to  what  the  attitude  of  the  United 
States  Steel  Corporation  was  upon  the  questions  of  output  and 
prices  and  of  impressing  upon  all  engaged  in  the  industry  that 
it  was  the  part  of  wisdom  and  prudence  to  govern  themselves 
accordingly.  We  further  believe  that  by  this  means  prices  were 
maintained,  output  restricted,  competition  stifled,  and  trade 
restrained,  just  as  certainly,  just  as  effectively,  and  just  as 
unlawfully  as  had  been  done  under  the  discarded  pooling  agree- 
ments of  former  years."  ^ 

Perhaps  the  best  evidence  of  the  success  of  the  policy  of 
cooperation,  promoted  by  pools  and  dinners,  is  the  course  of  the 
price  of  Bessemer  steel  rails.  From  1867  to  1900  (the  year  before 
the  formation  of  the  steel  trust)  the  price  of  steel  rails  varied 
every  year;  in  no  two  years  during  all  this  period  did  it  continue 
the  same.^  Prior  to  the  formation  of  the  Steel  Corporation  there 
was  severe  competition  in  steel  rails,  and  the  price  fell  from  $28 
per  ton  in  1896  to  $17  per  ton  in  1898.  A  combination  then 
raised  the  price  for  a  time  to  $35,  but  early  in  1901  it  went  as  low ' 
as  $26.  In  April,  1901,  the  Steel  Corporation  began  operations; 
in  May  the  price  of  rails  was  fixed  at  $28  per  ton;  and  the  price 
remained  at  that  figure  up  to  the  date  of  the  government  suit, 

'  Brief  for  the  United  States  (no.  481),  vol.  II,  p.  998. 

^  Stanley  Committee  Report,  p.  126. 

'  Brief  for  the  United  States  (no.  6214),  part  I,  p.  13. 


230       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

having  been  effectively  controlled  by  the  Steel  Corporation  in 
cooperation  with  the  independent  steel  manufacturers.  This 
price  of  $28,  it  may  be  noted,  was  some  $10  per  ton  higher  than 
the  prices  that  prevailed  during  1897-1898,  when  there  was 
competition  between  the  Carnegie  Steel  Company  and  the 
Illinois  Steel  Company;  though  the  prices  of  1897-1898  yielded 
these  companies  a  substantial  profit.^  The  ability  of  the  Steel 
Corporation  to  maintain  the  price  of  steel  rails  at  an  arbitrary 
figure,  despite  marked  fluctuations  in  demand  "  and  in  manufac- 
turing costs,  abundantly  testifies  to  the  tremendous  power  of  this 
mammoth  organization. 

^  Brief  for  the  United  States  (no.  481),  vol.  I,  p.  169. 

^  In  1901,  99.9  per  cent  of  the  rails  sold  were  Bessemer  rails.  Since  than 
date  Bessemer  rails  have  been  largely  superseded  by  open-hearth  rails.  In 
191 2  only  one-third  of  the  rails  sold  were  Bessemer  rails.  Brief  for  the 
Steel  Corporation  (no.  481),  p.  215. 


CHAPTER  X 

THE   INTERNATIONAL  HARVESTER  COMPANY  ^ 

The  International  Harvester  Company — the  harvester  trust — 
was  organized  in  New  Jersey  on  August  12,  1902.  It  represented 
a  consolidation  of  the  five  leading  manufacturers  of  harvesting 
machines, — the  McCormick  Harvesting  Machine  Company 
(with  a  factory  at  Chicago),  the  Deering  Harvester  Company 
(with  a  factory  at  Chicago),  the  Warder,  Bushnell  and  Glessner 
Company  (with  a  factory  at  Springfield,  Ohio),  the  Piano  Manu- 
facturing Company  with  a  factory  at  Piano,  Illinois  (near 
Chicago),  and  the  Milwaukee  Harvester  Company  (with  a 
factory  at  Milwaukee)."  The  five  plants  of  these  companies, 
according  to  an  official  statement,  were  the  largest  and  most 
complete  of  their  kind  in  the  world.*'  Among  them  they  pro- 
duced approximately  85  per  cent  of  the  total  output  of  harvesting 
machines  in  the  United  States.^  Their  control  of  the  harvester 
trade  in  the  territory  adjacent  to  them  (the  great  grain  growing 
states  of  the  country)  was  even  greater  than  85  per  cent,  since 
the  leading  competitors  of  the  trust  were  located  in  New  York 

^  On  the  International  Harvester  Company  see:  Report  of  the  Commis- 
sioner of  Corporations  on  the  International  Harvester  Company,  March  3, 
19 13;  Report  of  the  Federal  Trade  Commission  on  the  Causes  of  High  Prices 
of  Farm  Implements,  May  4,  ygio;  Brief  for  the  United  States  in  Interna- 
tional Harvester  Company  v.  United  States  (no.  757);  Brief  for  the 
International  Harvester  Company  (no.  757);  Brief  for  the  United  States  in 
International  Harvester  Company  v.  United  States  (no.  56);  Brief  for  the  In- 
ternational Harvester  Company  (no.  56);  Appendix  to  defendant's  brief  iw 
United  States  v.  International  Harvester  Company  (no.  624);  237  Missouri 
Reports  369-424;  234  U.  S.  199-215;  214  Fed.  Rep.  987-1012. 

2  Report  of  the  Commissioner  of  Corporations  on  the  International  Har- 
vester Company,  p.  67.  Hereafter  referred  to  as  Report  on  the  International 
Harvester  Company. 

3  Chron.,  75,  p.  345  (August  16,  1902). 

*  Report  on  the  International  Harvester  Company,  p.  67. 

231 


232        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

state,  with  a  market  largely  confined  to  the  North  Atlantic 
states  and  to  foreign  countries. 

Prior  to  the  organization  of  the  International  Harvester 
Company  competitive  conditions  had  prevailed  in  the  manufac- 
ture of  harvesting  machines.  Notable  improvements  in  the 
manufacturing  processes,  combined  with  a  steady  increase  in  the 
size  of  the  factories,  had  led  to  marked  economies  in  production; 
and  these  in  turn,  owing  to  competition,  had  led  to  considerable 
price  reductions.  At  various  periods  during  the  eighties  the 
manufacturers  had  endeavored,  through  price  agreements,  to 
hold  competition  in  check,  but  without  marked  success.  In 
1887  and  again  in  1890  attempts  had  been  made  to  form  a  com- 
bination of  the  leading  manufacturers,  and  in  1890  a  company 
had  actually  been  chartered  for  that  purpose;  but  in  both  in- 
stances the  plan  had  fallen  through.  From  1890  until  the 
organization  of  the  International  Harvester  Company  in  1902 
apparently  no  attempt  had  been  made  to  effect  a  consolidation. 
Competition,  generally  speaking,  had  been  quite  active.  In  fact 
the  organizers  of  the  International  Harvester  Company  subse- 
quently claimed  that  it  was  the  severity  of  competition  that 
made  a  combination  necessary.  The  president  of  the  Inter- 
national Harvester  Company  characterized  the  competition  as 
fierce;  list  prices  could  not  be  maintained.^  Mr.  Glessner,  of 
Warder,  Bushnell  and  Glessner,  expressed  the  opinion  that  "in 
the  harvester  business  there  was  a  competition  never  known  in 
any  other  business  in  the  world."  ^  Mr.  Jones,  of  the  Piano 
Manufacturing  Company,  testified  that  competition  was  so 
severe  that  neither  the  manufacturers  nor  the  dealers  were 
making  anything.^  Moreover,  the  Commissioner  who  heard 
the  testimony  in  a  suit  in  a  Missouri  court  described  the  compe- 
tition as  "active,  persistent,  strenuous,  and  fierce."  '^ 

The  claim  that  the  formation  of  a  harvester  trust  was  neces- 
sary to  avoid  ruinous  competition  was  analyzed  by  the  Bureau  of 

'  Report  on  the  International  Harvester  Company,  p.  59. 

^  Ibid.,  p.  60. 

3  Ibid.,  p.  61. 

*  237  Missouri  Reports  384. 


THE  INTERNATIONAL  HARVESTER  COMPANY    27,2, 

Corporations  in  its  investigation  of  the  International  Harvester 
Company.     "There  is  no  doubt"  said  the  Bureau,  ''that  the 
principal  motive  for  the  formation  of  the  International  Harvester 
Co.  was  to  eliminate  competition  and  to  secure  a  dominant  posi- 
tion in  the  trade."  ^    Though  the  desire  to  eliminate  competition 
led  to  the  organization  of  the  trust,  yet  competition  was  not  so 
severe,  in  the  opinion  of  the  Bureau,  as  to  make  the  formation  of 
a  trust  necessary.    Most  of  the  larger  companies,  it  reported,  had 
been  making  considerable  profits,  and  sometimes  very  large 
profits. 2    Specific  information  as  to  the  profits  of  the  harvester 
companies  prior  to  1902  was  difficult  to  obtain,  and  such  data  as 
was  gathered  by  the  Bureau  related  only  to  the  five  companies 
which  united  to  form  the  trust.    But  these  five  companies,  as  has 
been  pointed  out,  included  the  five  leading  manufacturers,  and 
produced  over  four-fifths  of  the  total  output.    Such  data  as  was 
available  showed  that  in  general  the  profits  of  the  large  com- 
panies had  been  quite  high  during  the  five  years  preceding  the 
organization  of  the  International  Harvester  Company.     The 
Piano  Manufacturing  Company,  it  is  true,  had  sustained  a 
deficit  in  both  1900  and  1901,  and  the  profits  of  the  Milwaukee 
Company  had  been  low  in  1901;  but  the  profits  of  the  McCor- 
mick  and  Deering  companies  had  been  high  in  every  one  of  the 
five  years,  and  the  profits  of  the  Milwaukee  Company  and  of 
Warder,  Bushnell  and  Glessner  (the  Champion  Company)  had 
generally  been  high.^    It  is  significant  that  in  three  of  the  five 
years  for  which  the  profits  were  shown  the  aggregate  annual 
profit  of  the  five  competing  companies  was  greater  than  the 
reported  profit  of  the  trust  during  any  one  of  the  first  six  years 
of  its  existence,  and  this  notwithstanding  the  fact  that  the 
period  after  1902  was  one  of  great  prosperity.*    It  is  also  signi- 
ficant that  a  committee  appointed  to  consider  the  taking  over  of 

1  Report  on  the  International  Harvester  Company,  p.  70. 

2  Ibid.,  p.  62. 

3  Ibid.,  p.  63. 

*Ibid.,  p.  64.  A  possible  explanation  of  the  low  "reported"  profit  of 
the  trust  is  the  large  amount  of  earnings  put  back  into  the  business,  es- 
pecially in  new  lines  and  in  plants  abroad. 


234       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  business  of  the  five  companies  which  combined  to  form  the 
trust  reported  that  each  of  these  companies  had  for  several  years 
enjoyed  a  "prosperous,  profitable  and  growing  business."  ^  In 
addition,  the  McCormick  and  Deering  companies,  especially, 
had  been  increasing  their  business  rapidly  prior  to  the  merger.'-^ 
The  Bureau  by  way  of  conclusion  said:  "This  large  increase  in 
the  volume  of  business  taken  in  connection  with  the  compara- 
tively high  rates  of  profits  earned  on  the  capital  invested  is  strong 
evidence  of  the  fact  that  the  companies  which  originally  formed 
the  International  Harvester  Co.  were  generally  not  suffering 
from  excessive  competition.  The  combination,  therefore,  can 
not  be  justified  on  the  principle  of  self-preservation."  ^ 

The  argument  most  frequently  advanced  in  favor  of  trusts  is 
that  they  make  possible  economies  not  otherwise  realizable. 
But — so  the  Bureau  of  Corporations  claims — the  expectation 
of  reducing  costs  was  only  a  secondary  motive  in  the  organiza- 
tion of  the  harvester  trust.*  This  matter  will  be  considered  in 
more  detail  later  on  in  this  chapter,  but  at  this  point  it  may  be 
stated  that  the  International  Company  did  effect  a  high  degree 
of  integration.  Through  its  constituent  companies  it  acquired 
coal  lands,  iron  ore  properties,  iron  and  steel  plants,  timber  lands, 
and  saw  mills.  By  supplying  itself  with  its  chief  raw  materials  at 
cost,  the  company  not  only  had  an  assured  supply,  but  kept  for 
itself  the  profits  that  otherwise  would  have  gone  to  other  con- 
cerns. (This  assumes  that  the  company  could  produce  its  steel, 
for  example,  cheaper  than  it  could  buy  it  from  the  steel  trust,  an 
assumption  apparently  justified  in  view  of  the  fact  that  the 
company  continued  to  make  its  own  steel.)  With  the  manu- 
facturing properties  also  went  binder  twine  mills  and  several 
industrial    railroads.      The    McCormick    concern    owned    the 

1  Brief  for  the  United  States  (no.  56),  pp.  18-19. 

2  Between  1899  and  1902  the  assets  of  the  McCormick  Company  increased 
from  $12  milHon  to  $50  million,  all  from  earnings.  Its  sales  of  the  principal 
harvesting  machines  increased  from  371,312  in  1900  to  503. 5^7  in  1902;  and 
the  Deering  Company's  sales  increased  during  the  same  period  from  281,574 
to  370,107.    Brief  for  the  United  States  (no.  56),  p.  8. 

3  Report  on  the  International  Harvester  Company,  p.  66, 
*  Ibid.,  p.  70. 


THE  INTERNATIONAL  HARVESTER  COMPANY  235 

Illinois  Northern  Railway,  a  short  line  connecting  the  McCor- 
mick  plant  and  other  industrial  enterprises  with  several  railroads 
entering  Chicago;  and  the  Piano  concern  owned  the  Chicago, 
West  Pullman  and  Southern  Railway. 

Another  motive  in  the  organization  of  the  International 
Harvester  Company  was  the  promotion  of  the  export  trade  in 
agricultural  implements.  It  was  claimed  on  behalf  of  the  com- 
pany that  none  of  the  companies  then  in  the  business  had  suffi- 
cient capital  and  credit  to  develop  the  foreign  trade  adequately, 
or  had  sufficient  trained  harvester  men  to  create  an  organization 
that  would  effectively  cover  the  foreign  field. ^  The  foreign  trade 
argument,  it  may  be  noted,  is  often  cited  as  a  justification  for  the 
trust.  Just  what  importance  this  factor  played  here  is  hard 
to  say.  The  testimony  of  the  president  of  the  International 
Harvester  Company  shows  that  the  five  companies  that  entered 
the  trust  had  already  built  up  a  very  large  export  business;  and 
this  was  true,  also,  of  the  four  independent  harvester  companies 
in  New  York  state.  ^  As  a  matter  of  fact,  American  harvesting 
machines  were  then  being  marketed  all  over  the  world.  After 
the  International  Harvester  Company  was  organized,  the  foreign 
trade,  it  is  true,  was  much  extended,  yet  whether  this  resulted 
from  the  organization  of  the  trust  or  whether  it  would  have  come 
about  anyhow  is  something  on  which  it  is  difficult  to  pass  judg- 
ment— ^is,  in  the  words  of  Judge  Smith,  "a  mere  matter  of 
speculation."^ 

Still  another  motive  for  the  formation  of  trusts  is  the  profit 
obtained  by  the  promoters.^  The  bankers  who  promoted  the 
harvester  trust  received  $3,148,197  in  stock  for  the  Milwaukee 
Harvester  Company, — one  of  the  five  original  companies.  This 
sum  seems  to  have  represented  the  value  of  the  property  con- 
veyed. In  addition  they  received  $2,957,143  in  stock  for  their 
services  as  promoters,  this  sum  being  over  and  above  all  expenses 

^  Brief  for  the  International  Harvester  Company  (no.  56),  pp.  55-56. 
See  also  p.  525. 

-  Report  on  the  International  Harvester  Company,  pp.  71-72. 
^214  Fed.  Rep.  993. 
*  Cf.  pp.  293  seq. 


236       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

incurred  in  the  formation  of  the  Harvester  Company.  This 
payment  of  almost  $3,000,000,  in  the  opinion  of  the  Bureau  of 
Corporations,  was  excessive.  To  the  extent  that  it  was  excessive 
it  served  as  an  inducement  for  the  promoters  to  form  the  trust. 
But  undoubtedly  it  would  be  a  mistake  to  attach  much  impor- 
tance to  this  factor  in  endeavoring  to  explain  the  organization 
of  the  International  Harvester  Company. 

The  formation  of  the  International  Harvester  Company  was 
noteworthy  for  the  absence  of  any  important  overcapitalization. 
At  its  organization  the  company  had  a  capital  of  $120,000,000, 
all  common  stock  (no  bonds).    Without  going  into  the  financial 
details  of  the  promotion,  half  of  the  stock  ($60,000,000)  was 
issued  for  cash,  which  was  to  constitute  working  capital;  and  the 
other  haK  was  issued  for  the  properties  acquired  and  for  bankers' 
commissions.^      Whether    there    was    any    overcapitalization 
depended  therefore  on  whether  the  properties  acquired  were 
worth  $60,000,000.  The  organizers  appraised  the  value  of  the 
property  at  approximately  $67,000,000,  not  counting  good  will, 
and  the  company  claimed,  therefore,  that  it  commenced  opera- 
tions with  a  surplus  of  $7,000,000.^      The  Bureau,  however, 
regarded  the  appraisal  value  as  excessive.    Though  it  found  it 
difficult  to  arrive  at  an  accurate  valuation  because  of  the  fact 
that  the  records  of  the  company  were  not  well  kept,and  because 
in  some  instances   the  company  denied  access   to  the  records, 
nevertheless  the  Bureau  felt  that  a  fair  valuation  would  be  about 
$49,000,000,  not  including  the  good  will.^    In  the  opinion  of  the 
Bureau,   the  difference  between  $60,000,000  and  $49,000,000 
must  be  regarded  as  having  been  issued  for  good  will  and  promo- 
tion services.     But  there  can  be  no  doubt  that  a  substantial 
amount  of  good  will  was  brought  into  the  merger,  quite  apart 
from  any  so-called  merger  value.    It  follows,  therefore,  that  if 
the  International  Harvester  Company  was  overcapitalized,  it 

^  Report  on  the  International  Harvester  Company,  p.  86. 

2  Ibid.,  p.  95.    See  also  Report  of  the  International  Iliirvester  Company 
for  1907,  in  Chron.,  86,  pp.  1471-1474. 

3  Report    on    the    International     Harvester    Company,    pp.    94,    96, 

125- 


THE  INTERNATIONAL  HARVESTER  COMPANY  237 

was  only  to  a  slight  degree.  This  variation  from  the  customary 
practice  is  perhaps  to  be  explained  partly  by  the  stock  market 
conditions  in  1902,  and  partly  by  the  fact  that  the  constituent 
companies  were  for  the  most  part  close  corporations.  The 
McCormick  family  alone  received  42.6  per  cent  of  the  stock  of 
the  International  Company,  and  the  Deering  family  received 
34.4  per  cent.  These  two  groups  between  them,  therefore,  re- 
ceived 77  per  cent  of  the  total  capitalization,  and  were  thus  in 
full  control. 

After  its  organization  the  International  Harvester  Company 
acquired  a  number  of  competing  enterprises.  In  1903  it  pur- 
chased D.  M.  Osborne  and  Company,  the  leading  independent 
concern.^  This  company  had  its  plant  at  Auburn,  New  York, 
and  was  thus  in  a  favorable  position  to  compete  for  the  export 
trade.  Its  chief  product  was  harvesting  machines,  but  it  also 
manufactured  tillage  implements  and  binder  twine.  As  part  of 
the  terms  of  the  sale  the  two  leading  active  stockholders  of  the 
Osborne  concern  agreed  that  for  a  period  of  ten  years  they  would 
not  engage  in  the  business  in  the  United  States  (except  in  Ari- 
zona and  New  Mexico),  Europe  (except  Belgium  and  Holland), 
South  America,  or  Australia,  thus  evidencing  the  monopolistic 
purpose  of  the  International  Harvester  Company.  During 
1903  and  1904  the  purchase  of  the  Osborne  concern  was  kept 
secret.  This  was  at  the  request  of  the  Osborne  Company,  in 
order  to  enable  it  to  collect  its  bills  receivable.-  During  this 
period  an  official  of  the  Osborne  Company  made  affidavits,  as 
required  by  the  anti-trust  laws  of  the  state  of  Missouri,  that  the 
company  was  not  a  party  to  any  agreement  or  combination  to 
fix  prices  or  output,  and  that  it  had  not  entered  into  any  arrange- 
ment which  in  any  way  tended  to  interfere  with  full  and  free 
competition  in  the  manufacture  and  sale  of  its  products.^ 

During  1903-1904  some  of  the  stockholders  of  the  Inter- 
national Harvester  Company  acquired  the  Minnie  Harvester 
Company,  the  Aultmann-Miller  Company,  and  the  Keystone 

^  Report  on  the  International  Harvester  Company,  p.  137. 
''Brief  for  tlie  International  Harvester  Company  (no.  757),  p.  38. 
'  Report  on  the  International  Harvester  Company,  p.  296. 


238        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Company.  These  three  companies  were  competitors  of  the 
International  Company,  and  were  acquired — the  Bureau  be- 
heved — largely,  if  not  almost  wholly,  for  the  purpose  of  elimi- 
nating their  competition.^  In  each  case  the  control  was  kept 
secret,  and  the  companies  passed  as  independents.  In  1905  these 
three  companies  (and  the  Osborne  Company)  were  transferred  to 
the  International  Company,  apparently  as  the  result  of  a  change 
of  policy  on  the  part  of  the  management.  Thereupon  the  pro- 
duction of  binders  at  these  three  plants  was  discontinued,  and 
the  plants  were  used  to  manufacture  binder  twine,  auto  buggies, 
trucks,  and  other  lines. 

The  International  Harvester  Company  also  endeavored  to 
extend  its  control  to  other  lines  of  farm  machinery, — lines  not 
competing  with  harvesting  machines.  In  1904  some  of  the  stock- 
holders of  the  company  secured  control  of  the  Weber  Wagon 
Company;  and  in  1905  the  property  of  this  company  was  trans- 
ferred to  the  International.  The  Weber  concern  occupied  a  very 
important  position  in  the  farm  wagon  trade;  and  through  it  and 
the  later  extension  of  its  business  the  International  Harvester 
Company  became  one  of  the  leaders  in  this  line. 

In  1906  the  International  Company  acquired  a  manure 
spreader  plant,  and  subsequently  it  attained  a  commanding 
position  in  this  branch  also.  The  company,  in  addition,  became 
the  selling  agent  for  a  number  of  concerns  making  plows,  seeding 
machines,  etc.,  and  in  this  way  broadened  its  interest  in  the 
farm  machinery  trade. 

The  company  also  developed  the  new  lines  at  its  old  plants. 
Thus,  at  the  Milwaukee  plant  the  manufacture  of  gasoline 
engines,  cream  separators,  and  tractors  was  begun  in  1904,  1905, 
and  1909,  respectively.  The  brands  formerly  made  at  the  Mil- 
waukee plant  were  thereafter  made  at  the  McCormick  works. 
Likewise  the  Piano  plant  ceased  manufacturing  harvesters — the 
brands  formerly  turned  out  there  were  thenceforth  manufac- 
tured at  the  Deering  plant — and  in  1905  and  1906  commenced 
the  manufacture  of  manure  spreaders  and  wagons.  The  Cham- 
pion plant  continued  to  make  harvesting  machines,  but  it  added 
1  Report  on  the  International  Harvester  Company,  p.  141. 


THE  INTERNATIONAL  HARVESTER  COMPANY  239 

hay  tools  in  1903,  seeders  in  1906,  and  manure  spreaders  in  1908. 
In  1910  a  large  tractor  works  was  opened  in  Chicago.  This 
was  the  only  important  new  plant  for  the  manufacture  of  agri- 
cultural implements  constructed  by  the  company  in  the  United 
States. 

From  the  sales  end  this  extension  into  new  lines  was  quite 
advantageous.  The  sales  of  harvesting  machines  in  any  given 
territory  are  generally  made  within  a  comparatively  short  period 
in  each  year.  The  sales  force  in  the  past  had  been  employed  for 
only  a  few  months  during  each  year,  and  it  had  then  been  dis- 
banded.^ The  extension  of  the  business  to  include  agricultural 
implements  used  at  different  seasons  of  the  year  made  it  possible 
to  sustain  an  all-year-round  selling  organization,  thus  contribut- 
ing decidedly  to  its  efficiency. 

The  Harvester  Company  also  strengthened  its  position  in  the 
export  trade.  This  it  did  by  the  purchase  of  foreign  companies, 
or  by  the  construction  of  plants  abroad.  For  example,  in  1903 
the  International  Harvester  Company  of  Canada  was  incor- 
porated. It  built  a  large  harvester  factory  at  Hamilton,  On- 
tario, and  subsequently  added  tillage  implements,  seeders,  and 
manure  spreaders.  Other  smaller  plants  were  likewise  acquired 
in  Canada.  The  Harvester  Company  also  built  or  acquired 
plants  in  France,  Germany,  Russia,  and  Sweden,  and  organized 
marketing  companies  in  a  number  of  other  countries.  The 
establishment  of  these  factories  abroad  was  chiefly  the  result 
of  the  protective  policy  of  these  foreign  countries.  Generally 
speaking,  it  proved  more  profitable  for  the  International  Har- 
vester Company  to  rnanufacture  the  machines  abroad  (thus 
saving  the  tariff  duty)  than  to  make  them  in  this  country  and 
export  them.  Obviously  there  was  a  great  saving  in  transporta- 
tion charges  as  well,  though  this  saving  was  offset  in  part,  at 
least,  by  the  greater  cost  of  production  in  the  foreign  plants,  the 
industry  being  one  particularly  suitable  to  this  country,  and  one 
in  which  the  economies  of  large-scale  production  are  great. 

In  1913  there  was  made  an  important  reorganization  directly 
affecting  the  newly  acquired  lines  and  the  foreign  business.  On 
^  Brief  for  the  International  Harvester  Company  (no.  757),  p.  61. 


240       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

account  of  the  suit  brought  by  the  government  to  effect  the 
dissolution  of  the  International  Harvester  Company  on  the 
ground  that  it  was  a  combination  in  restraint  of  trade,  the  board 
of  directors  organized  in  the  state  of  New  Jersey  on  January  27 
a  new  company,  called  the  International  Harvester  Corpora- 
tion.^ To  the  Corporation  were  transferred  all  the  domestic 
plants  exclusively  engaged  in  the  manufacture  of  the  "new 
lines,"  all  the  foreign  plants,  and  all  the  transportation  com- 
panies.^ The  capitalization  of  the  Corporation  consisted  of 
$30,000,000  preferred  stock  and  $40,000,000  common.  This,  it 
may  be  noted,  represented  just  half  the  total  of  each  class  of 
stock  of  the  International  Harvester  Company.  The  Company, 
starting  out  with  a  capital  of  $120,000,000,  all  common,  had  in 
1907  converted  half  of  the  common  into  preferred.  In  1910  it 
had  declared  a  33  1/3  per  cent  common  stock  dividend,  thus 
increasing  its  total  capitalization  to  $140,000,000.  Because  of 
the  organization  of  the  Corporation  with  a  capital  of  $70,000,000, 
the  Company  reduced  its  capital  from  $140,000,000  to  $70,000,- 
000,  and  changed  its  name  to  the  International  Harvester  Com- 
pany of  New  Jersey.^ 

This  plan  of  dissolution  was  approved  by  the  stockholders  in 
February,  1913.  Of  this  plan  the  Bureau  said:  " If  intended  as  a 
part  of  a  proposed  plan  of  disintegration,  the  Bureau  regards 
this  method  of  division  as  very  unsatisfactory.  Obviously,  it 
does  not  touch  the  most  essential  feature  of  the  company  as  a 
combination  of  competitors,  namely,  the  consolidation  of  the 
chief  harvesting-machine  plants  of  the  country,  and  especially  of 
the  McCormick,  Deering,  Champion,  and  Osborne  works."  * 

In  this  connection  mention  may  be  made  of  another  company, 
which  is  liable  to  be  confused  with  one  or  the  other  of  the 
foregoing  companies.    This  is  the  International  Harvester  Com- 

'  Chron.,  96,  p.  365  (February  i,  1913). 

2  Report  on  the  International  Harvester  Company,  pp.  169,  174. 

'  Holders  of  the  $70,000,000  cancelled  stock  were  entitled  to  receive  cash 
($100  per  share)  or  shares  in  the  corresponding  class  of  security  of  the  Corpo- 
ration. 

■*  Report  on  the  International  Harvester  Company,  p.  178. 


THE  INTERNATIONAL  HARVESTER  COMPANY  241 

pany  of  America.  In  the  original  merger  the  International 
Harvester  Company  did  not  acquire  the  stocks  of  the  companies 
combined;  it  merely  acquired  their  properties.  But  a  few  weeks 
later  it  did  acquire  the  capital  stock  of  the  Milwaukee  Har- 
vester Company,  and  with  it  its  charter.^  The  stock  of 
this  company,  as  distinguished  from  its  factory  (which  had 
already  been  acquired),  was  secured  in  order  that  the  company 
might  be  employed  as  a  selling  agency,  and  thus  relieve  the 
International  Harvester  Company  of  the  restrictions  that  it  was 
iikely  to  meet  in  the  conduct  of  business  in  other  states.  Thus, 
the  laws  of  some  states  excluded  corporations  with  a  capital  as 
large  as  that  of  the  International  Harvester  Company,  and  the 
laws  of  others,  while  admitting  foreign  corporations  (that  is, 
corporations  chartered  outside  the  state),  subjected  them  to 
heavy  taxation,  and  sometimes,  if  they  were  trusts,  refused  to 
license  them.  The  International  Harvester  Company,  being  a 
new  corporation,  would  doubtless  have  experienced  some  delay 
in  securing  licenses  in  the  several  states;  it  might  have  been 
denied  a  license  in  others  on  the  ground  that  it  was  a  trust; 
and  it  would  probably  have  been  subject  to  heavy  taxation, 
since  the  laws  of  some  states  made  the  amount  of  capitalization 
the  basis  of  taxation.  The  Milwaukee  Harvester  Company, 
however,  already  had  licenses  to  do  business  in  the  several  states, 
and  it  was  thus  well  suited  to  serve  as  a  selling  agency.  The 
International  Harvester  Company,  therefore,  transferred  to  the 
Milwaukee  Harvester  Company  (the  name  of  which  was  changed 
in  September,  1902,  to  the  International  Harvester  Company  of 
America)  practically  all  of  its  warehouses  and  other  facilities  for 
the  sale  of  its  machines,  and  constituted  it  its  sole  selling  agent. ^ 
The  International  Harvester  Company  (of  New  Jersey) ,  through 
the  ownership  of  all  of  the  capital  stock  of  the  International 
Harvester  Company  of  America,  of  course  controlled  its  selling 
agent  completely.^ 

1  Report  on  the  International  Harvester  Company,  p.  87. 

2  Ibid.,  p.  90,  and  237  Missouri  Reports  383. 

^  The  use  of  the  International  Harvester  Company  of  America  as  a  selling 
agency  was  held  by  the  Supreme  Court  of  Missouri  to  be  in  violation  of  the 


242       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

The  International  Harvester  Company  at  its  organization 
produced,  as  we  have  seen,  about  85  per  cent  of  the  country's 
output  of  harvesting  machines.  This  figure  is  not  exact,  since 
the  number  of  each  type  of  harvesting  machines  produced  by  the 
independent  concerns  is  not  known.  However,  reasonably  com- 
plete data  for  grain  binders,  mowers,  and  rakes — three  of  the 
most  important  machines — are  available,  and  especially  for  the 
first  two.  We  may  therefore  turn  to  an  examination  of  the 
position  of  the  International  Harvester  Company  in  these  lead- 
ing branches  of  the  industry. 

The  number  of  each  of  these  machines  sold  in  1902  by  the 
trust  and  by  the  independents,  with  percentages,  is  shown  in  the 
following  table. ^ 


International  Harvester  Co' 

Independent  concerns 

No.  sold  2 

Per  cent 

No.  sold  ^ 

Per  cent 

Grain  binders 

Mowers 

180,024 
297,880 
165,219 

90.9 
81.2 
67.0 

18,128 
68,890 
81,376^ 

9.1 

18.8 

Rakes 

33.0 

The  trust,  it  appears,  sold  over  ninety  per  cent  of  the  binders, 
over  eighty  per  cent  of  the  mowers,  and  nearly  seventy  per  cent 
of  the  rakes.  These  figures,  it  should  be  noted,  are  for  the  total 
sales  of  each  group,  including  the  export  trade.  Inasmuch  as  the 
independent  binder  concerns  had  a  relatively  large  export  trade, 
the  International  Harvester  Company  undoubtedly  controlled  a 
larger  percentage  of  the  domestic  market  than  the  figure  for 


state  law  forbidding  a  company  with  a  capital  as  large  as  that  of  the  Interna- 
tional Harvester  Company  to  obtain  a  license,  and  a  fine  and  ouster  (sus- 
pended conditionally),  was  ordered.  237  Missouri  Reports  374,  398.  This 
decree  was  affirmed  by  the  Supreme  Court  of  the  United  States.  234 
U.  S.  215. 

^  Report  on  the  International  Harvester  Company,  p.  92. 

2  Number  produced  in  the  case  of  the  Milwaukee  Harvester  Company. 

^  Number  produced  in  the  case  of  the  Osborne  Company. 

<  Number  for  independents  partly  estimated. 


THE  INTERNATIONAL  HARVESTER  COMPANY 


243 


total  sales  (90.9  per  cent)  would  indicate.  The  same  is  true  to  a 
lesser  degree  of  mowers  also. 

Similar  statistics  are  not  available  for  reapers  or  corn  bind- 
ers—other important  types  of  harvesting  machines— yet  in  all 
probability  the  proportion  of  the  business  in  these  lines  con- 
trolled by  the  International  Harvester  Company  was  nearly  as 
great  as  the  figure  shown  above  for  grain  binders. 

Always  pertinent  is  an  examination  of  the  ability  of  a  trust, 
once  formed,  to  retain  its  monopolistic  position.  Sufficient  data 
are  available  to  indicate  with  substantial  accuracy  the  relative 
position  of  the  International  Company  and  the  independents 
in  the  leading  lines  from  1902  to  191 1  and  in  1918.  The 
situation  with  respect  to  grain  binders  is  shown  in  the  table 
below.  ^ 

Production  of  Grain  Binders  in  the  United  States,  1902-1911,  1918 


International  Harvester  Co. 


1902, 
1903 
1904 

1905 
1906 
1907 
1908 
1909 
1910 
1911 

1918 


Number 


180,401  '' 
184,817 

87,371 
102,832 
108,666 
117,854 
104,547 
100,204 
125,382 
146,981 

53,281 


Per  cent 


90.9 
94.2 
89.1 
90.0 
87.0 
88.5 
89.7 
87.1 
87.0 
87.0 

65-3 


Independents  ^ 

Number 

Per  cent 

18,128 

9.1 

1 1 ,448 

5-8 

10,649 

10.9 

11,469 

10. 0 

16,233 

130 

15,264 

II-5 

12,054 

10.3 

14,848 

12.9 

18,701 

130 

21,923 

130 

28,312 

34-7 

1  Report  on  the  International  Harvester  Company,  p.  180;  and  Report  of 
the  Federal  Trade  Commission  on  the  Causes  of  High  Prices  of  Farm  Imple- 
ments, p.  679. 

2  Output  of  the  five  companies  entering  the  trust  in  1902. 

3  When  the  number  produced  by  the  independents  was  not  known,  the 
number  sold  was  used  instead.  As  a  rule  it  made  little  difference  which  figure 
was  used. 


244        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

From  an  examination  of  this  table  it  appears  that  the  Inter- 
national Harvester  Company  increased  its  proportion  of  the 
output  of  binders  from  90.9  per  cent  in  1902  to  94.2  per  cent  in 
1903.  This  may  be  ascribed  chiefly  to  the  acquisition  in  1903  of 
the  important  Osborne  concern.  Beginning  in  1903  there  was 
a  decline,  until  in  1906  only  87.0  per  cent  of  the  output  was  pro- 
duced by  the  trust.  After  a  slight  increase  in  1907  and  1908  the 
percentage  decHned  again  in  1909  to  87,  where  it  remained  in 

1 9 10  and  191 1.  The  International  Harvester  Company,  there- 
fore, in  spite  of  the  acquisition  of  several  competitors,  did  not 
quite  hold  its  own.  Moreover,  it  is  significant  that  while  the 
total  output  of  the  independents  increased  between  1902  and 
191 1,  notwithstanding  the  acquisition  of  several  of  their  number 
by  the  Harvester  Company,  the  total  output  of  the  trust  ac- 
tually declined.  Nevertheless  the  International  Company  still 
had  in  191 1  a  monopoly  position  in  the  manufacture  of  binders. 
Between  191 1  and  1918,  however,  the  company  lost  heavily. 
Whereas  in  191 1  it  had  produced  87  per  cent  of  the  total  output, 
by  1918  its  percentage  had  fallen  to  65.3  per  cent.^  This  marked 
decline  was  partly  due  to  the  growth  of  some  of  its  competitors, 
and  partly  due  to  the  falling  off  in  19 18  of  the  export  trade,  in 
which  the  International  Harvester  Company  was  the  leading 
factor. 

The  situation  with  respect  to  mowers  is  shown  in  the  table 
on  page  245.- 

As  with  binders,  the  International  Harvester  Company, 
through  the  acquisition  of  the  Osborne  concern,  increased  its 
proportion  of  the  country's  output  of  mowers  in  the  year  after  its 
organization.  In  1 90  2  the  company  produced  82.5  per  cent  of  the 
mowers  produced  in  this  country;  in  1903,  87.7  per  cent.  Yet 
its  proportion  since  1903  has  shown  a  declining  tendency.    In 

191 1  it  amounted  to  76.6  per  cent,  and  in  1918  to  only  59.5  per 

1  Report  of  the  Federal  Trade  Commission  on  the  Causes  of  High  Prices 
of  Farm  Implements,  p.  679. 

2  Report  on  the  International  Harvester  Company,  p.  182;  and  Report  of 
the  Federal  Trade  Commission  on  the  Causes  of  High  Prices  of  Farm  Imple- 
ments, p.  679, 


THE  INTERNATIONAL  HARVESTER  COMPANY  245 

Production  of  Mowers  in  the  United  States,  1902-1911,  1918 


International  Harvester  Co. 

Independents  ^ 

Number 

Per  cent 

Number 

Per  cent 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

I9I0 

19II 

I9I8 

324,1802 

318,505 

221,186 

250,677 
213,269 
260,764 
276,349 
279,589 
260,526 
241,285 

111,501 

82. 5 
87.7 
82.1 
84.1 
79.0 
81.6 
82.1 
80.7 

77-7 
76.6 

59-5 

68,913 
44,755 
48,309 
47,468 
56,860 
58,730 
60,467 
66,970 
74,630 
73,886 

75,809 

17 
12 

17 
15 
21 
18 
17 
19 
22 

23 
40 

S 
3 
9 
9 

0 

4 
9 
3 
3 
4 

5 

cent.  Whereas  the  output  of  mowers  by  the  independents 
increased  nearly  7,000  between  1902  and  1918,  that  of  the  trust 
declined  by  over  210,000. 

The  data  for  rakes  are  not  so  complete.  The  Bureau  esti- 
mated, however,  that  the  five  companies  merged  into  the  Inter- 
national Harvester  Company  produced  in  1902,  67.8  per  cent 
of  the  rakes;  that  in  1903,  with  the  acquisition  of  the  Osborne 
Company,  the  proportion  probably  exceeded  80  per  cent;  and 
that  in  191 1  it  had  fallen  to  about  72  per  cent.^  The  per- 
centage in  1 91 8  was  placed  by  the  Federal  Trade  Commission 

at  57-5-^ 

The  dominant  position  of  the  International  Harvester  Com- 
pany is  well  brought  out  by  the  following  table,  which  shows  the 
number  of  harvesting  machines  of  all  kinds  sold  in  191 1  by  every 

1  When  the  number  produced  by  the  independents  was  not  known,  the 
number  sold  was  used. 

2  Output  of  the  five  companies  entering  the  trust  in  1902. 

3  Report  on  the  International  Harvester  Company,  p.  183.  According 
to  the  Brief  for  the  International  Harvester  Company  (no.  56),  p.  io8a,  the 
International  Company  in  1905  sold  77.8  per  cent  of  the  rakes  disposed  of  in 
this  country,  and  in  1911,  67.8  per   cent. 

*  Report  on  the  Causes  of  High  Prices  of  Farm  Implements,  p.  679. 


246       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 


concern  contributing  as  much  as  i  per  cent  to  the  country's  total 
sales,  and  the  percentage  sold  by  each.^ 

Sales  of  Harvesting  Machines  in  the  United  States  in  iqii,  wrrn 

Percentages 


International  Harvester  Co 

Acme  Harvesting  Machine  Co 

Johnston  Harvester  Co 

Deere  and  Co 

Emerson-Brantingham  Co 

W.  A.  Wood  Mowing  and  Reaping  Machine  Co. 

Adriance,  Piatt  and  Co 

Thomas  Mfg.  Co 


Number 


374,390 

76.96 

23,603 

4 

85 

18,684 

3 

84 

16,886 

3 

47 

14,480 

2 

98 

13,017 

2 

67 

8,193 

I 

69 

S,8oo 

I 

19 

Per  cent 


The  International  Harvester  Company  in  191 1  sold  over 
three-fourths  of  the  total  number  of  harvesting  machines  sold  in 
this  country.  Its  percentage  would  be  even  larger  were  it  cal- 
culated upon  a  basis  of  value  rather  than  of  number,  since  the 
company's  control,  generally  speaking,  was  greatest  for  the 
higher  priced  machines,  such  as  grain  binders,  corn  binders,  and 
headers.  The  next  largest  harvester  concern  was  the  Acme 
Company,  with  a  capital  of  $3,500,000  (the  capital  of  the  Inter- 
national Company  was  $70,000,000).^  The  Acme  Company 
sold  less  than  5  per  cent  of  the  harvesting  machines  sold  in  this 
country,  and  unlike  the  International  it  did  not  make  the  entire 
line  of  harvesting  machines.  The  only  independent  concern 
that  did  make  an  entire  line  was  the  Johnston  Harvester  Com- 
pany, capitalized  at  less  than  $2,000,000,  and  producing  less  than 
4  per  cent  of  the  total  output  of  harvesting  machines.  In  corn 
binders  the  International  Company  in  191 1  had  only  three 
competitors;  in  reapers,  only  four;  and  in  grain  binders,  eight, 
four  of  whom  were  quite  unimportant.  In  mowers  and  rakes 
alone  was  there  any  considerable  number  of  competitors;  but 
none  of  them  had  as  much  as  8  per  cent  of  the  trade  in  either 
of  these  lines.^   Again,  hardly  any  of  the  independents  competed 

1  Brief  for  the  United  States  (no.  56),  p.  26.  "^  Ibid.,  p.  in. 

3  Ibid.,  p.  no. 


THE  INTERNATIONAL  R^RVESTER  COMPANY  247 

with  the  International  Company  throughout  the  whole  United 
States;  their  sales  were  confined  mainly  to  the  East,  especially 
New  York  state  and  the  New  England  states. 

Since  the  above  date  (191 1)  a  number  of  strong  concerns  have 
entered  the  field.  Among  them  is  Deere  and  Company,  with  a 
capital  in  191 1  of  $58,007,100.  This  expansion  of  the  Deere 
Company  was  made  on  the  principle  of  carrying  a  full  line  (no 
company,  not  even  the  International,  had  a  really  complete  line 
of  farm  machinery),^  and  the  strong  selling  organization  already 
possessed  by  the  Deere  Company  and  by  other  independents 
made  it  easier  for  them  to  secure  a  good  share  of  the  harvesting 
machine  business  than  it  would  have  been  for  a  newly  organized 
concern. 

So  far  as  the  lines  other  than  harvesting  machines  are  con- 
cerned, the  Bureau  of  Corporations  estimated  that  the  Interna- 
tional Harvester  Company  produced  in  1909  the  following  per- 
centages of  the  various  products. ^ 

Corn  shredders 55-7 

Binder  twine 55.1  (62.7  in  1911) 

Manure  spreaders 55.1  (191 1) 

Spring  tooth  harrows 49.  i 

Disk  harrows 25 . 9  (43 .  i  in  191 1) 

Hay  stackers 24 .  2 

Hay  loaders 20 . 8 

Farm  wagons 13.0  (about  15.0  in  1911) 

Wheeled  cultivators 11. 5 

Through  the  acquisition  of  other  companies  and  through  the 
expansion  of  its  own  plants,  the  International  greatly  increased 
its  output  in  the  new  lines.  Naturally  its  monopolistic  position 
in  the  harvesting  machine  trade  facilitated  this  development  of 
its  business. 

How  is  the  ability  of  the  International  Harvester  Company  to 

1  The  acquisition  of  plow  plants  by  the  International  Harvester  Company 
in  1919  has  given  it  practically  a  full  line,  since  plows  were  practically  the 
only  type  of  farm  implement  it  was  not  then  producing. 

2  Report  on  the  International  Harvester  Company,  pp.  184-188.  The 
estimate  is  based  on  the  Census  reports  and  the  production  of  the  Interna- 
tional Company  as  given  in  its  annual  reports. 


248        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

maintain  its  semi-monopolistic  position  to  be  explained?  The 
chief  sources  of  its  power  seem  to  have  been  two:  first,  its  pro- 
ductive efficiency;  second,  its  possession  of  large  financial  re- 
sources. 

First.  The  International  Harvester  Company,  generally 
speaking,  produced  its  machines  at  a  lower  cost  than  its  com- 
petitors. This  was  especially  true  of  grain  binders,  the  most 
important  harvesting  machine.  Thus,  the  average  factory  cost 
of  producing  binders  at  the  domestic  plants  of  the  International 
Harvester  Company  during  the  two  years  1910  and  191 1  com- 
bined was  $56.32,  the  figures  for  the  different  plants  being 
$54.11,  $56.30,  $64.94  and  $73.78.^  (These  factory  costs  do  not 
include  general  and  miscellaneous  expenses,  nor  a  very  large 
item  of  selling  expense.)  The  average  factory  cost  for  the  four 
leading  independents  was  $70.83.  (To  some  extent  these  dif- 
ferences in  cost  resulted  from  differences  in  the  machines,  though 
the  machines  were  substantially  similar  in  type.)  For  only  two 
of  the  four  independents  was  the  factory  cost  distinctly  below 
the  highest  factory  cost  of  the  International  Harvester  Com- 
pany, and  for  one  independent  the  factory  cost  was  distinctly 
higher  than  the  cost  in  any  of  the  four  factories  of  the  Inter- 
national Company.  In  each  instance  the  output  of  the  inde- 
pendent plants  was  much  smaller  than  the  output  of  any  of  the 
International  Company's  plants,  except  one.  The  relative 
smallness  of  the  independent  plants  largely  explains  their  higher 
factory  costs.  If  we  prorate  over  the  total  factory  costs  the 
general  and  miscellaneous  expenses  not  included  in  the  foregoing 
figures,  the  showing  of  the  independent  plants  is  even  less 
favorable.  Wliile  this  may  be  the  result  in  part  of  different 
methods  of  keeping  costs,  it  is  unquestionably  due  in  consider- 
able measure  to  the  comparatively  small  output  of  the  inde- 

'  Report  on  the  International  Harvester  Company,  p.  260.  The  basis  of 
the  discussion  of  costs  that  follows  is  the  above  report,  pp.  260-265.  It 
should  be  noted  that  the  raw  materials  which  are  produced  by  the  Inter- 
national Company  for  its  own  use  are  charged  up  to  costs  on  the  basis  of  the 
prevailing  market  prices,  and,  therefore,  its  costs  are  comparable  with  those 
of  the  independent  producers. 


THE  INTERNATIONAL  HARVESTER  COMPANY  249 

pendent  plants.  If  we  add  the  general  and  miscellaneous  ex- 
penses to  the  factory  costs,  the  average  cost  of  binders  for  the 
International  Harvester  Company  during  1910-1911  becomes 
$58.57,  and  for  the  independents  $76.18.  This  difference  is  con- 
siderable, yet,  it  should  be  noted,  it  is  no  larger  than  the  differ- 
ence between  the  costs  at  the  several  International  plants. 

The  foregoing  differences  in  costs  must  not  be  understood  to 
indicate  the  relative  profit  per  machine,  since  the  selUng  expense 
of  the  International  Company  was  much'  higher  per  machine 
than  that  of  the  independents.  Apparently  this  high  selling 
expense  was  the  result  of  its  elaborate  selling  organization, 
which  strengthened  its  hold  on  the  trade  and  aided  it  in  obtain- 
ing a  large  volume  of  business.  Yet  it  is  still  true,  in  spite  of  its 
high  selling  expense,  that  the  margin  of  profit  for  the  Interna- 
tional Company  was  larger  than  it  was  for  the  independents. 

The  International  Harvester  Company  thus  found  one  of  its 
chief  sources  of  power  in  its  lower  cost  of  producing  binders, — 
the  most  important  machine  in  the  harvester  trade. 

Much  the  same  was  true  of  mowers  and  rakes.  The  factory 
cost  of  mowers  at  the  four  plants  of  the  International  Company 
ranged  during  the  period  1910-1911  from  $18.78  to  $27.35,  and 
averaged  $20.09.  For  the  independents  the  average  was  $24.98. 
For  some  of  the  independent  plants,  therefore,  the  cost  was  less 
than  for  some  of  the  International  Company  plants;  in  fact,  at 
all  the  independent  plants  the  factor}'  cost  was  lower  than  at  the 
plant  of  the  International  Company  with  the  highest  cost,  and 
at  all  but  two  of  the  independent  plants  the  factory  cost  was 
lower  than  at  the  plant  of  the  International  Company  with  the 
second  highest  cost.  While  some  of  the  independent  plants 
produced  more  mowers  than  did  the  smallest  International 
plant,  yet  most  of  them  produced  less.  None  of  the  independ- 
ents, however,  had  an  output  which  could  compare  with  that  of 
the  McCormick  and  the  Deering  plants,  and  as  a  result  their 
costs  were  higher  in  comparison.  As  with  binders  the  selling 
expense  was  less  for  the  independent  concerns. 

The  average  cost  of  rakes  for  the  International  Company  was 
$10.84,  and  for  the  independents  $12.47.    The  factory  cost  for 


250       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  most  eflScient  independent  plants  was  thus  much  nearer  the 
factory  cost  for  the  most  efficient  of  the  International  Company 
plants  than  for  either  binders  or  mowers,  and  therefore  the 
advantage  of  the  trust  was  less  in  this  branch  than  in  the  other 
two  leading  branches. 

It  is  clear  from  what  has  been  said  that,  generally  speaking,  the 
International  Harvester  Company  could  produce  harvesting 
machines  more  cheaply  than  its  competitors.^  It  seems  evident, 
also,  that  this  advantage  was  mainly  due  to  the  large  volume  of 
its  output.  In  the  harvester  business  the  process  of  manufac- 
ture, which  requires  the  use  of  a  considerable  variety  of  raw 
materials,  is  highly  elaborate,  and  large  factories  with  expensive 
equipment  are  necessary.  Low  production  costs  can  be  attained 
only  through  a  minute  division  of  labor;  and  this  involves  pro- 
duction on  a  large  scale.  It  was  in  the  largest  plants  of  the  Inter- 
national Company,  namely,  the  McCormick  and  the  Deering 
plants,  that  the  lowest  costs  were  attained;  and  in  some  of  the 
smaller  plants  the  costs  were  even  higher  than  for  the  independ- 
ents. The  advantage  of  the  trust  in  production  rested,  therefore, 
to  a  very  large  degree  on  the  fact  that  it  included  the  two  largest 
plants.^  The  important  query,  therefore,  is  not  whether  the 
trust  could  produce  more  cheaply  than  its  smaller  rivals  (this 
can  hardly  be  disputed) ,  but  whether  the  McCormick  and  Deer- 
ing plants,  the  largest  in  the  country  in  1902  (and  because  of  the 
volume  of  their  output  possessing  the  lowest  costs)  became  more 
efficient  by  virtue  of  the  fact  that  they  entered  the  trust.  To 
this  question  no  definite  answer  can  be  given.  One  fact,  how- 
ever, is  clear.  The  organization  of  the  International  Harvester 
Company  did  not  reduce  the  costs  of  the  McCormick  and  Deer- 

1  For  a  comparison  of  the  cost  of  producing  harvesting  machines  in  1916 
and  in  19 18  at  the  McCormick  works  of  the  International  Company  and  at 
five  independent  plants,  see  Report  of  the  Federal  Trade  Commission  on  the 
Causes  of  High  Prices  of  Farm  Implements,  p.  669. 

2  The  output  of  binders  at  the  McCormick  plant  during  each  year  from 
1903  to  191 1  exceeded  by  at  least  eight  times  the  output  of  binders  at  any 
independent  plant  during  the  corresponding  year.  The  output  of  mowers  at 
the  McCormick  plant  was  six  times  greater  than  the  output  of  any  independ- 
ent. 


THE  INTERNATIONAL  HARVESTER  COMPANY  25 1 

ing  plants  through  an  increase  in  the  volume  of  their  output 
(perhaps  the  most  important  factor  leading  to  low  costs),  be- 
cause the  volume  of  production  at  these  plants  was  as  great  prior 
to  the  merger  as  at  any  subsequent  date.^ 

Second.  Another  element  of  strength  was  the  possession  by 
the  International  Harvester  Company  of  large  financial  re- 
sources. This  enabled  it  to  maintain  an  elaborate  selling  organi- 
zation,— an  organization  to  handle  not  only  harvesting  machines, 
but  a  great  variety  of  agricultural  implements,  such  as  wagons, 
spreaders,  etc.,  with  a  consequent  saving  in  the  cost  of  market- 
ing. The  possession  of  large  financial  resources  also  made  it 
possible  for  it  to  grant  long  terms  of  credit  to  purchasers.  The 
practice  of  extending  credit  for  considerable  periods  was  origi- 
nally employed  in  the  harvester  business  because  of  the  inability 
of  the  farmers  to  pay  cash  (binders,  for  example,  are  quite  ex- 
pensive) ;  and  though  farmers  are  now  in  a  better  position  than 
formerly  to  pay  cash,  the  system  is  still  used  as  a  means  of  getting 
trade,  particularly  in  foreign  countries.  The  International 
Company,  acquiring  a  strong  financial  position  by  the  act  of 
combination,  not  only  retained  this  practice  in  the  harvesting 
machine  business,  but  more  conspicuously  than  any  other  con- 
cern extended  it  to  the  newer  lines,  which  are  generally  less 
expensive,  and  which  were  formerly  sold  on  a  cash  basis.  The 
company  was  aided  in  carrying  out  this  policy  by  the  backing  of 
J.  P.  Morgan  and  Company,  its  fiscal  agents,  and  by  the  loans  of 
Mr.  John  D.  Rockefeller,  a  father-in-law  of  one  of  the  McCor- 
micks. 

The  charge  has  been  made  that  the  International  Harvester 
Company,  especially  in  the  years  immediately  following  its 
organization,  resorted  to  unfair  competitive  methods.  This 
charge  may  be  briefly  considered. 

(i)  The  International  Company  up  to  1905  paraded  as  inde- 
pendent certain  concerns  that  in  reality  were  not  independent. 
The  most  important  of  these  concerns  was  the  firm  of  D.  M. 
Osborne  and  Company.  This  practice,  however,  came  to  an  end 
in  1905. 

1  Report  on  the  International  Harvester  Company,  pp.  257-258. 


252        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

(2)  The  International  Company  in  its  commission  agency 
contracts  up  to  1905  inserted  a  clause  requiring  the  dealer  to 
handle  the  company's  harvesting  machines  exclusively.^  With 
trust  proceedings  threatening  in  several  states,  this  clause  was 
removed  in  1905,  and  was  not  restored.^  In  fairness  to  the 
company  it  should  be  said  that  the  exclusive  contract  clause  was 
customary  among  harvester  companies  prior  to  the  establish- 
ment of  the  merger,  and  that  some  concerns  in  the  implement 
trade  continued  to  retain  it  in  their  agency  contracts  even  after 
it  was  abandoned  by  the  International  Company.^  It  might 
seem  as  if  there  were  no  objection  to  the  requirement  that  a 
dealer  handle  the  goods  of  only  one  company,  since  such  a  provi- 
sion has  the  obvious  advantage  of  enhsting  the  interest  of  the 
dealer  in  the  selling  of  the  manufacturer's  article.  Yet  it  should 
be  clear  that  this  requirement  may  result  in  monopoly.  If  there 
are  only  a  few  dealers  in  a  given  town,  and  each  one  of  these  is 
given  some  brand  of  the  trust's  harvesters,  the  requirement  of 
exclusive  dealing  may  shut  out  the  machines  of  the  independent 
manufacturers,  particularly  if  the  machines  of  the  trust  are  in 
such  insistent  demand  that  a  dealer  must  handle  them  if  he  is  to 
do  a  profitable  business. 

(3)  The  International  Company  so  allotted  its  brands  of  har- 
vesting machines  as  to  enlist  the  services  of  an  undue  proportion 
of  dealers.'*  Some  95  per  cent  of  the  farm  machinery  in  this 
country  was  purchased  from  the  local  retail  dealer;  and  at  most 
towns  there  were  only  two  or  three  dealers.''  The  International 
Company  by  giving  only  one  brand  of  its  machines  to  a  particu- 
lar dealer  was  able — so  the  Bureau  of  Corporations  put  it — to 
absorb  the  services  of  all  or  at  least  a  large  proportion  of  the 
dealers  in  any  one  locality.  The  opinion  was  common  in  the 
trade  that  the  purpose  of  the  company  in  giving  a  different  line 

1  81  Kansas  Reports  611.  According  to  Brief  for  the  International  Har- 
vester Company  (no.  56),  p.  96,  this  clause  was  not  enforced. 

2  Report  on  the  International  Harvester  Company,  p.  304. 

^  Bnef  for  the  International  Harvester  Company  (no.  757),  p.  80. 
''  Report  on  the  International  Harvester  Company,  p.  290. 
'Ibid.,  pp.  291,  293. 


THE  INTERNATIONAL  HARVESTER  COMPANY  253 

to  each  dealer  was  largely  to  prevent  these  dealers  from  pushing 
the  sales  of  the  goods  of  competing  manufacturers.  The  repre- 
sentatives of  the  company  denied  that  they  had  any  such  pur- 
pose; and  urged  that  even  if  this  was  the  effect,  as  claimed  by 
the  Bureau  of  Corporations,  it  was  not  an  unfair  method  of 
competition,  if  not  accompanied  by  a  requirement  of  exclusive 
dealing.  ^ 

(4)  Complaint  was  also  made  that  in  some  cases  the  Inter- 
national Company  resorted  to  local  price  cutting.  While  there 
may  have  been  instances  of  resort  to  this  device,  yet  in  general 
it  was  the  practice  of  the  company  to  charge  dealers  uniform 
prices  for  similar  machines.^ 

(5)  The  International  Company  through  its  industrial  rail- 
ways obtained  excessive  divisions  of  the  through  rate  on  the 
transportation  of  its  goods  to  market.  This  was  brought  to 
light  through  an  investigation  of  the  Interstate  Commerce  Com- 
mission in  1904.^  The  Illinois  Northern  Railway  and  the  Chi- 
cago, West  Pullman  and  Southern  Railway  (both  controlled  by 
the  International  Company)  operated  terminal  railroads  in  the 
city  of  Chicago.  For  the  switching  services  performed  by  them 
a  reasonable  compensation  would  have  been  $3.50  and  $3.00  per 
car,  respectively.  In  fact,  however,  these  tap  lines  received  a 
division  of  the  through  rate  amounting  in  some  cases  to  as  much 
as  $12  per  car.  The  Commission  held  that  the  excess  of  the 
amount  received  by  the  industrial  railways  of  the  International 
Company  over  a  reasonable  payment  was  in  its  essence  a  rebate 
to  the  company.  This  use  of  the  industrial  railway  to  evade 
the  prohibitions  of  the  law  forbidding  rebates  now  stands  defi- 
nitely prohibited,  and  there  is  no  evidence,  so  far  as  the  author 
is  aware,  that  the  International  Company  continued  to  employ 
the  device.**     Certainly  there  would  be  no  advantage  to  the 

^  Brief  for  the  International  Harvester  Company  (no.  56),  pp.  101-102. 

^  Report  on  the  International  Harvester  Company,  p.  325. 

'  See  10  I.  C.  C.  Reports  385-404. 

*  According  to  President  Roosevelt  (in  a  letter  dated  August  22,  1907) 
the  International  Harvester  Company  promised  in  1904  to  rectify  the  prac- 
tices disclosed  by  the  investigation  of  the  Interstate  Commerce  Commission, 


254        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

company  in  its  employment  after  19 13,  since  in  that  year  the 
industrial  railways  were  transferred  to  a  separate  corporation,— 
the  International  Harvester  Corporation. 

The  International  Company  also  made  use  of  price  Usts,  and 
its  salesmen  were  guilty  of  misrepresenting  the  machines  of 
competitors.^  Yet  on  the  whole  the  conduct  of  the  company  was 
remarkably  free  from  unfairness  in  its  relations  with  competi- 
tors.2  Even  its  competitors  testified  to  this  effect.  Most,  if  not 
all,  of  its  objectionable  practices  were  abandoned  some  time 
before  the  government  instituted  its  dissolution  suit;  or  were 
the  result  of  competition  between  agents,  and  were  not  coun- 
tenanced by  the  higher  officials  of  the  company. 

The  company,  furthermore,  was  not  bolstered  up  by  the 
control  of  the  limited  supply  of  a  natural  resource  (its  control 
over  the  raw  material  used  to  make  binder  twine, — manilla  and 
sisal  fiber, — may  possibly  be  an  exception  to  this  general  state- 
ment) ;  its  monopoly  position  was  not  due  to  patent  rights  (the 
basic  patents  had  expired  prior  to  its  organization);  and  such 
tariff  protection  as  it  has  had  has  been  unimportant. •''  If,  there- 
fore, there  is  such  a  thing  as  a  "good  trust"  the  International 
Harvester  Company  can  doubtless  qualify  as  well  as  any  other. 
The  suit  brought  by  the  government  against  this  company  thus 
squarely  presented  to  the  courts  the  question  as  to  whether  a 
trust  is  illegal  or  not,  irrespective  of  the  methods  employed  by  it.^ 

The  establishment  by  the  International  Company  of  a  monop- 
oly position  and  the  substantial  maintenance  of  that  position 
for  a  number  of  years  have  been  shown.  What  has  been  the 
policy  of  the  monopoly  with  respect  to  prices? 

and  it  stood  ready  in  1907  to  prove  that  it  had  abided  by  its  promise.    Cong. 
Record,  April  25,  191 2,  p.  5318. 

1  Report  on  the  International  Harvester  Company,  pp.  310,  324. 

2  There  can  be  no  doubt,  said  Judge  Sanborn  of  the  Circuit  Court,  "  that 
the  consistent  and  persistent  purpose,  policy,  rule  of  action,  and  practice  of 
the  defendants  has  been  and  is  to  avoid  and  prevent  all  acts  and  methods 
unfair,  unjust,  or  oppressive  toward  their  competitors."    214  Fed.  Rep.  1008. 

3  Since  the  passage  of  the  tariff  act  of  1913  agricultural  implements  can  be 
imported  free  of  duty. 

*  Cf .  p.  436. 


THE  INTERNATIONAL  HARVESTER  COMPANY  255 

The  significant  comparison,  of  course,  is  between  prices  prior 
to  1902  and  prices  after  1902.  The  only  evidence  on  this  point 
that  has  come  to  our  attention  is  a  table  prepared  by  the  Inter- 
national Harvester  Company,  showing  the  price  of  six  foot 
binders  and  five  foot  mowers  from  1892  to  1912.^  From  this 
table  it  appears  that  the  price  of  binders  advanced  in  1900  and 
1901  (the  two  years  prior  to  the  organization  of  the  trust),  but 
fell  in  1902  (the  year  the  trust  was  organized)  to  its  former  figure, 
where  it  remained  through  1907.  Substantially  the  same  was 
true  of  the  price  of  mowers.  The  government  in  its  Brief  con- 
ceded that  the  circular  or  asking  prices  of  harvesting  machines 
had  not  materially  advanced  since  1902,  but  contended  that  the 
prices  actually  received  were  not  the  same.-  Upon  the  organiza- 
tion of  the  trust — so  it  alleged — the  constant  shading  of  prices 
was  stopped,  thus  leading  to  an  actual  increase  in  the  return 
realized  by  the  International  Harvester  Company.  The  defend- 
ants counter  attacked  by  pointing  out  that  the  government  had 
not  called  a  single  witness  to  testify  that  prices  had  been  ad- 
vanced to  the  injury  of  the  farmer,  thus  leading  to  the  presump- 
tion that  no  such  injury  had  in  fact  resulted.^ 

The  course  of  prices  from  1903  to  191 1  for  certain  kinds  of 
farm  machinery  is  shown  by  the  table  on  page  256. 

The  table  shows  the  average  prices  realized  by  the  Inter- 
national Company  for  its  chief  classes  of  machines.  Slight 
changes  in  prices  from  year  to  year  do  not,  it  should  be  noted, 
necessarily  indicate  any  actual  change  in  the  prices  charged. 
This  is  because  these  prices  are  generally  averages  for  all  types 
and  sizes  of  a  given  machine,  and  a  variation  in  the  proportion 
of  machines  of  the  various  sizes  sold  would  naturally  cause  a 
change  in  the  average  price  received,  even  though  in  the  meantime 
there  had  been  no  change  in  the  price  of  any  particular  machine. 
Yet  making  full  allowance  for  such  factors,  it  is  still  true  that 
during  the  period  from  1903  to  191 1  there  was  a  general  advance 

^  See  Appendix  to  Brief  for  the  International  Harvester  Company  (no. 
624),  p.  286. 

-Brief  for  the  United  States  (no.  56),  p.  171. 

^  Brief  for  the  International  Harvester  Company  (no.  757),  p.  127. 


256       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 


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THE  INTERNATIONAL  HARVESTER  COMPANY  257 

in  the  price  of  harvesting  machines.  For  example,  in  1908  the 
price  of  5,  6,  and  7  foot  binders  was  advanced  by  $7.50;  the  price 
of  8  foot  binders  by  $15.00  (1907  and  1908);  and  the  price  of 
mowers  by  $2.50.  Yet  to  conclude  from  this  statement  that  the 
trust  made  for  higher  prices  would  not  be  fair.  Prices  of  mate- 
rial and  of  labor  were  undoubtedly  rising,  and  an  increase  in  prices 
might  therefore  have  taken  place,  trust  or  no  trust.  Again,  the 
quality  of  the  machines  might  have  improved  in  the  meantime.^ 
As  bearing  on  the  responsibility  of  the  trust  for  the  advance,  we 
may  note  that  the  prices  of  disk  harrows  and  two-horse  wagons, 
in  the  manufacture  of  which  competition  was  quite  active,  were 
also  advanced  in  1908.  Again,  in  191 2  the  International  Com- 
pany made  a  general  reduction  in  the  price  of  its  harvesting 
machines.  Grain  binders  were  reduced  $5.00,  and  proportionate 
reductions  were  made  for  other  harvesting  machines.  This 
reduction  was  attributed  by  the  company  to  a  decline  in  the 
cost  of  production,  yet  it  is  perhaps  significant  that  it  was  made 
after  the  government  had  begun  preparations  to  file  a  bill  against 
the  company. 

Some  idea  of  the  reasonableness  of  the  prices  charged  may  be 
had  by  an  analysis  of  the  profits  realized.  The  profits  of  the  In- 
ternational Company  may  be  determined  by  two  methods:  first, 
by  a  comparison  of  its  net  earnings  with  its  net  assets;  second,  by 
a  comparison  of  its  net  earnings  with  its  capital  stock  and  sur- 
plus.   The  table  below  shows  the  results  by  the  first  method." 

Ratio  of  Net  Earnings  to  Net  Assets,  Exclusive  of  Good  Will,  as 

Computed  by  the  Bureau,  1903-1911 

Year  Ratio  Year  Ratio 

1903 0.733        1908 8.73 

1904 5-34  1909 13-43 

1905 7.01  1910 12.77 

1906 6.74  191 1 11.51 

1907 7-31 

^  The  International  Company  claims  that  this  was  the  fact.     Brief  for  the 

International  Harvester  Company  (no.  56),  p.  52. 

2  Report  on  the  International  Harvester  Company,  p.  238. 

3  This  is  for  a  period  of  fifteen  months.  For  an  explanation  of  the  low 
earnings  in  1903,  see  ibid.,  pp.  207-210, 


258        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

The  average  rate  of  earnings  for  the  nine  years  was  8.47  per 
cent;  and  if  we  leave  out  the  exceptional  year  1903  the  average 
was  over  9.00  per  cent.  A  striking  fact  is  the  gradual  increase 
in  the  prosperity  of  the  company.  The  rate  of  profit  averaged 
4.36  per  cent  during  the  first  three  years;  7.59  per  cent  during  the 
next  three  years;  and  12.57  per  cent  during  the  three  years 
following  the  price  advance  of  1908.  Hence  while  the  profits  of 
the  company  were  quite  reasonable  on  the  average,  during  the 
later  years  they  were  distinctly  higher.  It  should  be  remem- 
bered, however,  that  in  these  figures  no  allowance  is  made 
for  good  will.  The  company  made  no  entry  for  good  will  on  its 
books,  and  the  Bureau  found  it  difificult  to  compute  its  amount. 
Were  good  will  to  be  included  in  the  net  assets,  the  rate  of  profit 
would  be  much  lower. 

The  second  method  is  to  show  the  profits  on  the  capital  stock 
and  surplus. 

Ratio  of  Net  Earnings  as  Reported  by  the  International  Harvester 
Company  to  Capital  Stock  ant)  Surplus,  1903-1911  ^ 

Year  Ratio  Year  Ratio 

1903 4-70^  1908 6.73 

1904 4  64  1909 10.89 

1905 6.08  1910 10.91 

1906 5-85  1911 9-95 

1907 6.31 

The  earnings  on  the  capital  stock  and  surplus  averaged  7.34 
per  cent  for  the  nine  years  and  10.58  per  cent  for  the  last  three 
years.  These  figures  are  somewhat  below  the  ratio  of  earnings 
to  net  assets,  since  the  Bureau  found  the  company  to  be  slightly 
overcapitalized  at  its  organization.^    Yet  had  the  good  will  been 

'  Appendix  to  Brief  for  the  International  Harvester  Company  (no.  624), 
pp.  163-164. 

^Computed  on  the  capital  stock  (3 120,000,000). 

^  Through  the  reinvestment  of  surplus  earnings  the  original  deficiency  in 
physical  assets  had  been  entirely  overcome  by  the  end  of  1908,  and  up  to  the 
stock  dividend  of  1910,  at  any  rate,  the  company  was  undercajiitalized 
rather  than  overcapitalized.  Report  on  the  International  Harvester  Com- 
pany, p.  25. 


THE  INTERNATIONAL  HARVESTER  COMPANY  259 

included  in  making  the  earlier  calculation,  the  result  might  have 
been  different. 

It  is  apparent  that  by  either  method  of  calculation  the  earnings 
of  the  International  Company  were  moderate.^  And  even  more 
moderate  were  the  dividends  actually  disbursed  to  stockholders. 
The  rate  of  dividend  was  3  per  cent  in  1903,  and  4  per  cent  in 
1904,  1905,  and  1906.  In  the  latter  year  the  stock  was  divided 
into  $60,000,000  preferred  and  $60,000,000  common.  On  the 
preferred  a  rate  of  7  per  cent  was  begun  in  June,  1907,  and  this 
rate  was  regularly  paid  thereafter.  No  dividend  was  paid  on  the 
common  stock  during  1907-1909.  In  1910  a  ^^  1/3  per  cent 
common  stock  dividend  was  declared,  and  a  quarterly  dividend 
of  I  per  cent  inaugurated.  In  191 1  the  rate  was  increased  to 
I  1/4  per  cent  quarterly. 

It  is  worth  noting,  in  closing  this  subject,  that  the  rate  of  profit 
obtained  by  the  International  Company  was  much  greater  for 
its  highly  monopolized  lines — that  is,  harvesting  machines — 
than  for  the  newer  lines,  such  as  wagons  and  spreaders.-  In  other 
words,  the  influence  of  monopoly  on  prices  and  profits  is  some- 
what obscured  by  the  fact  that  the  figures  given  are  for  the  total 
profits  of  the  International  Company  rather  than  for  its  profits 
in  those  branches  that  were  monopolized. 

'  Some  tables  showing  the  earnings  of  the  International  Company  from 
1913-1918  may  be  found  in  the  Report  of  the  Federal  Trade  Commission  on 
the  Causes  of  High  Prices  of  Farm  Implements,  pp.  90-95. 

2  Report  on  the  International  Harvester  Company,  p.  240. 


CHAPTER  XI 
THE  EFFECT   OF  TRUSTS   ON  PRICES 

Having  surveyed  the  trust  movement  and  having  studied  in 
detail  a  number  of  representative  trusts,  we  may  now  turn  to  an 
examination  of  the  underlying  causes  of  the  trust  movement. 
An  understanding  of  the  reasons  for  forming  trusts  will  enable 
the  reader  more  readily  to  comprehend  the  popular  attitude 
toward  them  as  evidenced  in  legislative  enactments  and  judicial 
proceedings;  and  will  greatly  assist  him  in  determining  what  the 
public  policy  with  respect  to  them  should  be. 

The  primary  explanation  of  the  trust  movement,  notably  that 
characterizing  the  period  from  1898  to  1903,  would  appear  to  be 
the  desire  of  the  manufacturers  to  restrict  or  eliminate  competi- 
tion, and  thus  to  establish  monopoly  prices.  Whether  this 
competition  that  it  was  desired  to  eliminate  was  "  ruinous"  in  its 
nature  is  a  question  we  have  analyzed  elsewhere  at  considerable 
length,  the  conclusion  being  that  competition  can  not  properly 
be  regarded  as  ruinous,  except  possibly  in  a  quite  limited  range 
of  industries.^  A  secondary  influence  was  the  hope  of  achiev- 
ing the  economies  of  the  trust  form  of  organization, — a  topic 
that  will  receive  consideration  in  chapter  XIX.  Third,  though 
of  less  importance,  was  the  lure  of  large  profits  for  the  trust 
promoters,  men  who  conceived  the  idea  of  a  trust  in  a  given 
industry,  or,  if  they  did  not  conceive  it,  at  least  carried  it  through 
to  a  successful  consummation.  There  were  other  incentives,  to 
be  sure,  such  as  the  ambition  of  certain  individuals  to  become 
Napoleons  of  industry,  but  undoubtedly  these  were  the  three 
principal  motives.    First,  then,  as  to  the  trust  and  prices. 

The  evidence  as  to  the  effect  of  trusts  on  prices  has  been  pre- 
sented for  a  number  of  trusts;  and  may  be  briefly  summarized  at 
this  point.    In  making  this  summary  and  throughout  the  sub- 

1  Quarterly  Journal  of  Economics,  34,  pp.  473-519  (1920). 
?6q 


THE  EFFECT  OF  TRUSTS  ON  PRICES  261 

sequent  discussion  the  endeavor  will  be  made  of  course  to  avoid 
a  dogmatic  presentation;  the  difficulty  of  speaking  with  positive- 
ness  on  this  perplexing  matter  is  fully  realized.  It  is  easy  to  show 
that  on  innumerable  occasions  the  organization  of  a  trust  or  the 
tightening  of  monopoly  control  has  been  accompanied  by  higher 
prices,  yet  one  can  not  always  be  certain  that  prices  would  not 
also  have  advanced  under  competitive  conditions.  Despite  the 
dL65culties,  however,  it  is  beheved  that  both  history  and  general 
reasoning  establish  the  tendency  of  the  trusts  to  increase  prices. 
First,  as  to  the  teachings  of  experience. 

One  of  the  earliest  and  most  powerful  trusts  was  the  Standard 
Oil  Company.  The  prices  charged  for  oil  by  this  company 
formed  the  subject  of  an  unusually  elaborate  study  by  the  Bu- 
reau of  Corporations,  as  the  result  of  which  the  Bureau  was  able 
to  speak  with  confidence  and  authority  concerning  the  effect  of 
the  oil  trust  on  prices.  The  Standard  Oil  Company,  so  the 
Bureau  noted,  had  repeatedly  claimed  that  it  had  reduced  the 
price  of  oil;  that  it  had  been  a  benefit  to  the  consumer;  and  that 
only  a  great  combination  like  the  Standard  could  have  furnished 
oil  at  the  prices  that  had  prevailed.  "  Each  one  of  these  claims," 
said  the  Bureau,  "is  disproved  by  this  report."  With  regard  to 
the  period  to  1897,  though  the  price  statistics  for  these  early 
years  were  by  no  means  complete,  yet  making  all  the  necessary 
allowances  '^  they  demonstrate  the  falsity  of  the  historic  claim  of 
the  Standard  Oil  Company  that  by  reason  of  its  extraordinary 
efficiency  it  has  brought  prices  to  a  point  lower  than  would  have 
been  reached  had  business  remained  under  normal  competitive 
conditions  and  in  the  hands  of  a  number  of  comparatively 
smaller  concerns."  ^  For  the  period  following  1897  and  down  to 
1905  the  statistics  were  very  full,  having  been  collected  by  the 
Bureau  directly  from  thousands  of  retail  dealers  throughout  the 
country.  A  careful  analysis  of  these  figures  establishes,  said  the 
Bureau,  that  ''  the  Standard  had  consistently  used  its  power  to 
raise  the  price  of  oil  during  the  last  ten  years,  not  only  absolutely 
but  also  relatively  to  the  cost  of  crude  oil."  ^    The  Bureau  as- 

^  Report  on  the  Petroleum  Industry,  part  II,  p.  XXXIII. 
2  Ibid.,  p.  XXX. 


262       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

serted  that  the  Standard  had  used  its  monopohstic  power  to 
"  oppress  the  pubhc  through  highly  extortionate  prices,"  and  the 
truth  of  this  assertion  is  abundantly  demonstrated  by  the 
voluminous  evidence  presented  in  its  report  on  oil  prices. 

The  effect  of  trusts  on  prices  is  shown  in  illuminating  fashion 
by  the  experience  of  the  sugar  trust.  The  story  is  found  on 
pages  116-119.  Briefly  summarized,  it  appears  that  the  margin 
between  the  price  of  raw  sugar  and  of  refined  sugar  was  high 
during  the  early  eighties,  and  declined  rapidly  after  1882  and 
until  1887  (the  year  in  which  the  sugar  "trust"  was  formed). 
The  decline  in  the  margin  between  1882  and  1887  reflected  the 
keen  competition  that  prevailed, — a  competition  so  severe  that 
only  those  refiners  who  realized  the  economies  of  large-scale 
production  were  able  to  operate  at  a  profit.  Many  refiners, 
particularly  those  who  failed  to  envisage  the  inevitable  trend 
toward  larger  production  units,  were  indeed  obliged  to  withdraw 
permanently  from  the  business.  In  October,  18S7,  the  "  trust 
agreement"  became  effective;  and  the  margin  rose  from  three- 
quarters  of  a  cent  per  pound  (in  1887)  to  one  and  one-quarter 
cents  (in  1888),  an  increase  of  approximately  65  per  cent.  No 
doubt  the  margin  was  abnormally  low  prior  to  the  formation  of 
the  "trust";  and  therefore  it  is  difficult  to  say  how  much  of  the 
increase  is  fairly  attributable  to  it.  The  high  margin  of  1888, 
however,  speedily  attracted  new  competition;  and  as  a  result 
the  margin  fell  in  1890  to  an  even  lower  figure  than  during  the 
eighties.  In  1892  the  trust,  through  the  acquisition  of  a  number 
of  competitors,  secured  nearly  a  complete  monopoly  of  the  sugar 
refining  industry;  and  the  margin  was  considerably  advanced 
once  more.  As  before,  this  induced  new  competition,  as  the 
result  of  which  the  margin  fell  below  the  cost  of  refining.  Upon 
the  acquisition  of  several  competitors  in  1900,  prices  and  margins 
again  went  up;  but  this  led  to  the  construction  of  competing 
refineries,  and  in  1904  the  margin  again  declined.  Taking  there- 
fore the  first  eighteen  years  of  the  life  of  the  trust — the  margin 
after  1905  indicates  the  existence  of  competitive  conditions — it 
appears  that  sugar  prices  were  low  when  competition  was  pres- 
ent,  and    were    advanced   when   competition    was   absent   or 


THE  EFFECT  OF  TRUSTS  ON  PRICES  263 

brought  under  control.  The  conclusion  seems  to  be  justified 
that  the  trust  made  for  high  prices,  and  that  it  did  little,  if 
anything,  to  steady  them.^ 

Trusts  in  the  steel  industry  seem  also  to  have  made  for  higher 
prices  of  steel  products.-  The  most  important  of  the  trusts 
organized  in  the  various  branches  of  the  iron  and  steel  industry 
during  1898  to  1900  were  the  American  Tin  Plate  Company,  the 
American  Steel  and  Wire  Company,  and  the  National  Tube 
Company — the  Carnegie  Company,  the  Federal  Steel  Company, 
and  the  National  Steel  Company  were  mammoth  combinations, 
the  first  two  doing  a  larger  business  in  the  aggregate  than  any  of 
the  steel  trusts,  yet  they  did  not  individually  monopolize  any 
important  branch  of  the  trade.  The  American  Tin  Plate  Com- 
pany was  organized  in  December,  1898,  for  the  purpose,  accord- 
ing to  its  president,  "of  getting  together  to  do  away  with  foolish- 
ness in  making  prices."  ^  For  several  years  prior  to  its  formation 
the  price  of  tin  plates  had  shown  a  declining  tendency,  the 
average  monthly  price  at  New  York  per  hundred  pounds  being 
$3.50  in  January,  1S96  (the  maximum  for  1896-1898),  and  $2.89 
in  December,  1898.^  From  that  month  on  it  steadily  increased 
until  by  September  of  the  following  year  it  had  reached  a 
monthly  average  of  $4.83,  or  nearly  $2.00  per  hundred  pounds 
higher  than  when  the  trust  was  formed.  The  price  remained  at 
this  figure  without  deviation  of  more  than  a  cent  until  August, 
1900.  By  October  of  1900  the  price  had  fallen  to  $4.19,  where 
it  remained  unchanged  for  two  years. ^ 

The  American  Steel  and  Wire  Company  of  New  Jersey  was 
organized  in  January,  1899.  During  the  preceding  year  the  price 
of  wire  nails  at  Pittsburg  had  averaged  $1.34  per  hundred 
pound  keg,  being  $1.29  in  December,  1898.^    The  price  advanced 

^  On  this  latter  point  see  Jenks  and  Clark,  The  Trust  Problem,  pp.  138-139. 

*  See  pp.  196-197,  203,  225-230. 

^  Industrial  Commission,  I,  p.  885. 

*  Brief  for  the  United  States  (no.  481),  vol.  II,  p.  1047. 

^  See  Jenks,  Bulletin  of  the  Department  of  Labor,  vol.  V,  no.  29,  p.  735,  for 
a  table  showing  that  the  increase  in  the  price  of  tin  plate  during  1899  was 
much  greater  than  the  increase  in  the  cost  of  raw  materials. 

*  Brief  for  the  United  States  (no.  481),  vol.  II,  p.  1045. 


264        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Steadily  throughout  1899,  the  average  for  the  year  being  $2.32 
per  keg,  or  nearly  75  per  cent  higher.^  By  January,  1900,  the 
price  had  reached  $3.20  per  keg,  but  it  did  not  long  remain  at 
this  height.  The  outbreak  of  competition  during  the  middle  of 
1900  brought  the  price  down  to  $2.20  per  keg,  yet  this  was  much 
above  the  price  that  had  prevailed  prior  to  the  formation  of  the 
trust,  and  more  than  the  trust  was  able  to  get  in  the  years  that 
followed.  The  price  of  plain  wire  at  Pittsburg  followed  the  same 
general  movement.  From  a  figure  of  $1.13  per  hundred  pounds 
in  December,  1898,  it  rose  to  $3.05  in  January,  1900,  and  then 
declined  to  $2.15  in  May.  During  the  same  period  the  price  of 
barbed  wire  advanced  from  $1.75  per  hundred  pounds  to  $3.80 
per  hundred  pounds.^  Mr.  Gates,  the  chairman  of  the  company, 
testified  in  November,  1899,  that  the  rapid  advance  in  the  price 
of  barbed  wire  was  no  doubt  due  to  the  fact  that  the  company 
had  a  complete  monopoly.^ 

The  National  Tube  Company  was  organized  in  June,  1899. 
The  year  previous  to  its  formation  the  price  of  tubes  was  $30.00 
per  gross  ton;  the  year  of  its  formation,  $67.00  per  ton;  and  early 
in  the  year  after  its  formation,  as  high  as  $89.00  per  ton.^ 

But  it  is  not  at  all  clear  to  what  degree  the  trusts  were  respon- 
sible for  these  increases  in  prices.  These  early  steel  trusts  were 
formed  during  a  period  of  prosperity,  which  would  have  led  to 
higher  prices  even  in  the  entire  absence  of  artificial  inflation. 
Costs,  moreover,  were  advancing,  since  the  prices  of  raw  mate- 
rials likewise  responded  to  the  heavy  demand.  The  prices  of  the 
finished  products,  however,  increased  more  rapidly  than  costs, 
and  as  a  result  profits  were  unusually  large.  Whether  prices  and 
thus  profits  were  higher  than  they  would  have  been  had  it  not 
been  for  the  trusts  is  a  question  that  can  not  be  answered  with 
certainty.    However,  such  would  appear  to  have  been  the  case; 

iThe  advance  in  prices  was  greater  than  the  increase  in  raw  material 
costs.  See  Jenks,  Bulletin  of  the  Department  of  Labor,  vol.  V,  no.  29, 
p.  744. 

2  Brief  for  the  United  States  (no.  481),  vol.  II,  p.  161. 

'  Industrial  Commission,  I,  p.  1009. 

*  See  p.  196. 


THE  EFFECT  OF  TRUSTS  ON  PRICES  265 

and  certainly  the  trust  organizers  in  enormously  overcapitaliz- 
ing the  properties  anticipated  such  an  outcome. 

As  is  indicated  by  the  table  on  page  203,  the  formation  of  the 
United  States  Steel  Corporation  was  not  followed  by  as  con- 
siderable an  advance  in  the  prices  of  steel  products  as  was  the 
case  on  the  formation  of  the  earlier  steel  trusts.  The  prices  in 
May,  1901  (the  first  month  after  the  organization  of  the  Corpo- 
ration) were  higher  than  the  prices  in  October,  1900  (the  last 
month  in  which  competition  was  active)  for  every  product 
shown  except  tin  plates,  yet  the  increase  was  not  so  noteworthy 
as  in  the  case  of  the  earlier  trusts.  No  doubt  a  partial  explana- 
tion is  the  fact  that  the  combination  and  trust  movement  in  this 
industry  during  1898  to  1900  had  already  established  prices  on  a 
high  level.  It  would  appear  also  that  the  managers  of  the  Cor- 
poration, profiting  by  the  experience  of  the  earUer  trusts,  had 
chosen  to  charge  more  moderate  prices  in  order  to  discourage 
potential  competitors.  The  real  influence  of  the  organization  of 
the  Steel  Corporation  would  be  best  shown,  of  course,  by  a 
comparison  of  the  prices  that  prevailed  in  1901  with  those  that 
would  have  prevailed  in  1901  (and  subsequent  years)  had  the 
battle  of  giants  been  allowed  to  proceed;  but  this  comparison 
obviously  cannot  be  made. 

The  extent  of  the  control  exercised  over  prices  by  the  Steel 
Corporation  is  well  shown  by  the  movement  (or  lack  of  move- 
ment) of  steel  rail  prices.  This  matter  is  discussed  on  page  229. 
The  Corporation's  practice  of  maintaining  the  same  prices  over 
comparatively  long  periods  was  employed  also  in  the  case  of 
billets,  plates,  structural  steel,  tin  plates,  wire,  wire  nails,  bars, 
and  black  sheets,  though  by  no  means  to  the  same  degree.^ 
The  poUcy  was  possible,  however,  only  because  of  cooperation 
with  its  competitors  as  arranged  through  the  so-called  Gary- 
dinners  and  other  devices.  That  these  prices  were  highly  prof- 
itable is  proven  by  the  enormous  profits  obtained  by  the  Cor- 
poration, enabhng  it  within  fifteen  years  more  or  less  to  squeeze 
out  the  water  from  its  stock,  which  at  the  beginning  had  little 
behind  it  but  the  hope  of  monopoly  gains. 

1  See  Brief  for  the  United  States  (no.  481),  vol.  II,  pp.  1038-1047. 


266        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

The  tobacco  trust  was  fully  investigated  by  the  Bureau  of 
Corporations,  and  a  volume  dealing  particularly  with  prices, 
costs,  and  profits  was  issued.  Nevertheless  for  several  reasons  it 
is  difficult  to  speak  positively  concerning  the  effect  of  the  trust 
on  prices.  Thus,  the  American  Tobacco  Company  when  or- 
ganized in  1890  secured  control  of  the  cigarette  business,  yet 
detailed  data  covering  prices  of  cigarettes  are  not  available  for 
the  years  prior  to  1893.  After  1893  the  net  price  of  cigarettes 
less  taxes  steadily  declined  until  1899,  and  then  rapidly  advanced 
almost  uniformly  down  to  1910.^  However,  these  price  move- 
ments were  roughly  in  harmony  with  costs;  the  profit  per  thou- 
sand remained  fairly  steady  throughout  the  whole  period.  That 
the  prices  were  highly  remunerative  is  shown  by  the  analysis  of 
profits  on  pages  161  seq. 

The  proportion  of  the  little  cigar  business  done  by  the  trust 
is  not  known  for  the  years  prior  to  1898.  In  that  year  it  pro- 
duced less  than  50  per  cent  of  the  little  cigar  output  of  the 
country.  Its  share  of  the  business  steadily  increased  until  by 
1910  it  amounted  to  over  90  per  cent  of  the  total.  Likewise  the 
profit  per  thousand  steadily  increased,  being  41  cents  per  thou- 
sand in  1898,  and  $1.03  per  thousand  in  1910.-  Net  prices  (less 
tax)  were  no  higher  in  1910  than  in  1898,  but  costs  were  very 
much  lower.  The  trust  thus  kept  for  itself  all  the  benefits  of 
declining  costs. 

For  plug  tobacco  the  statistics  are  more  complete.^  In  1894 
the  net  price  of  plug  tobacco  less  taxes  amounted  to  29.1  cents 
per  pound.  At  that  time  no  one  company  dominated  the 
industry.  During  1894  the  American  Tobacco  Company 
instituted  a  campaign  for  the  domination  of  the  plug  business, 
and  prices  were  severely  cut,  falling  to  12.2  cents  per  pound  in 
1897.  Early  in  1898  a  combination  was  agreed  upon,  and  the 
price  for  the  year  rose  to  16.7  cents  per  pound.  During  the 
following  year  the  Liggett  and  Myers  Tobacco  Company  was 

1  See  p.  155. 

^  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  III,  p.  182. 
3  See  pp.  157-159. 


THE  EFFECT  OF  TRUSTS  ON  PRICES  267 

acquired,  and  the  price  averaged  21.0  cents,  and  in  1900,  22.8 
cents.  In  the  years  that  followed  control  was  made  effective, 
and  prices  and  profits  increased.  By  1908  (the  high-water  mark 
for  prices  down  to  1910)  the  price  had  reached  30.3  cents,  and 
the  profit  8.0  cents,  as  compared  with  a  loss  during  each  year 
from  1895  to  1898.  The  appropriation  by  the  trust  of  the 
benefits  of  the  remission  of  the  Spanish-American  war  taxes  also 
testifies  to  the  power  and  workings  of  trusts. 

Similar  results  appear  upon  an  examination  of  the  prices  and 
profits  obtained  in  the  smoking  tobacco  and  snuff  branches.  A 
comparison  of  the  latter  business  (the  most  highly  monopolized 
branch  of  the  tobacco  industry)  with  the  cigar  business  (the 
least  monopolized  branch)  is  unusually  instructive  in  its  bearing 
on  the  comparative  results  of  monopoly  and  competition.  On 
this  point  the  reader  is  referred  to  page  159. 

The  data  are  not  available  to  determine  what  influence  has 
been  exerted  on  prices  by  the  harvester  and  shoe  machinery 
trusts,  the  two  remaining  trusts  of  those  described  in  some  detail. 
So  far  as  the  harvester  trust  is  concerned,^  it  does  not  appear  that 
it  has  increased  prices  to  an  appreciable  degree.  The  Depart- 
ment of  Justice  made  the  allegation  that  while  the  circular  prices 
of  harvesting  machines  were  not  increased  upon  the  organization 
of  the  trust  in  1902,  the  prices  actually  received  did  increase 
through  the  abandonment  of  price  cutting.  However,  the 
government  introduced  no  evidence  to  support  this  allegation, 
and  the  company  unequivocally  denied  it.  The  Bureau  of 
Corporations  in  its  report  on  the  International  Harvester  Com- 
pany devoted  comparatively  little  space  to  the  subject  of  prices, 
but  concluded  that  the  company  had  taken  advantage  of  its 
monopolistic  position  in  harvesters  to  increase  both  prices  and 
margins,  while  reducing  prices  in  those  outside  lines  in  which  it 
had  to  meet  keen  competition.^  It  is  easy  to  show,  of  course, 
that  there  was  a  general  advance  in  the  price  of  harvesters  during 
1903  to  191 1,  yet  this  was  a  period  of  rising  prices  and  costs,  and 
hence  it  would  not  be  fair  in  the  absence  of  complete  information 

1  See  pp.  254-257. 

2  Report  on  the  International  Harvester  Company,  p.  255. 


268       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

to  attribute  the  advance  to  the  trust,  particularly  since  the  price 
of  some  agricultural  implements  that  were  subject  to  competition 
likewise  advanced.  The  fact  is  that  the  International  Harvester 
Company  during  the  period  from  1903  to  19 11  earned  a  compara- 
tively moderate  return  on  a  capitalization  singularly  free  from 
water.  In  part,  of  course,  this  low  rate  of  return  resulted  from 
the  fact  that  its  profits  on  the  competitive  lines  were  combined 
with  its  profits  on  the  monopohzed  lines,  thus  tending  to  obscure 
the  influence  of  monopoly  on  prices  and  profits. 

The  whisky  trust  is  not  one  of  the  concerns  described  in  detail 
in  the  preceding  chapters.  However,  the  prices  charged  by  it 
have  been  carefully  investigated  by  Professor  Jenks;  ^  and  we 
may  summarize  his  conclusions.  Professor  Jenks  points  out  that 
immediately  after  the  organization  of  the  whisky  "  trust "  in  1887 
the  prices  of  spirits  were  reduced  rather  than  advanced.  How- 
ever, this  reduction  in  prices  was  designed  to  force  the  remaining 
competitors  into  the  "trust";  and  when  this  purpose  had  been 
accomphshed  prices  were  increased,  and  the  profits  became  very 
large.  The  profits  were  so  good  in  fact  that  new  distilleries  were 
constructed,  and  accordingly  in  1889  prices  had  to  be  cut  to  crush 
the  new  competition.  In  1890  the  "  trust "  reorganized  under  the 
corporate  form;  and  during  the  middle  of  1891  acquired  its 
principal  rival.  Prices  and  margins  thereupon  increased.  Early 
in  1893  the  price  and  the  margin  were  at  a  very  high  point,  but 
by  the  middle  of  1894,  because  of  competition,  speculation,  and 
poor  management  on  the  part  of  the  trust  officials,  the  price 
had  fallen  very  low,  and  the  margin  had  entirely  disappeared. 
In  January,  1895,  the  trust  went  into  the  hands  of  a  receiver. 

We  need  not  follow  the  whisky  trust  through  its  checkered 
career.  It  will  suffice  to  state  Professor  Jenks'  conclusion  that 
the  trust  was  able  to  control  the  price  of  spirits  rather  effectively 
for  comparatively  short  periods  after  each  reorganization;  and 
that  at  times  it  used  this  control  to  increase  prices  and  margins, 
and  at  other  times  it  reduced  prices  to  injure  its  competitors.    On 

1  See  The  Trust  Problem  (1917),  pp.  141-149;  Bulletin  of  the  Department 
of  Labor,  vol.  V,  pp.  726-731;  Political  Science  Quarterly,  4,  pp.  309-314, 
and  5,  pp.  495-497- 


THE  EFFECT  OF  TRUSTS  ON  PRICES  269 

the  whole,  however,  either  because  of  the  persistence  of  competi- 
tion or  because  of  the  poHcy  of  the  management,  prices,  down 
to  1898  at  least,  were  less  stable  than  prior  to  the  formation  of 
the  trust. ^  In  the  later  years  of  its  life,  notably  after  1900,  the 
trust  adopted  the  policy  of  charging  more  moderate  prices  in 
the  hope  of  keeping  competition  within  bounds.-  Like  many 
other  trusts  it  had  found  that  a  grasping  policy  defeated  its  own 
ends  by  artificially  stimulating  production,  and  thus  making 
impossible  the  maintenance  of  prices  at  a  profitable  level. 

That  the  trust  organizers  anticipated  that  the  estabhshment 
of  monopoly  conditions  would  permit  the  charging  of  prices 
above  a  competitive  level  is  indicated  by  the  huge  structure  of 
overcapitaHzation  that  they  erected.^  Generally  speaking,  the 
capitalization  of  the  trusts  was  twice  as  large  as  the  value  under 
competitive  conditions  of  the  properties  and  businesses  that  they 
acquired.  Usually  the  preferred  stock  represented  the  value  of 
the  plants  prior  to  their  union  in  the  trust,  and  the  common  stock 
the  hope  of  monopoly  profits.  Returns  on  the  common  stock  of 
the  trust,  unbacked  as  it  was  by  property,  might  be  reaped  were 
one  of  two  results  achieved:  first,  a  reduction  of  costs  consequent 
upon  the  realization  of  the  economies  of  the  trust  form  of  organi- 
zation; or  second,  the  elevation  of  prices  to  a  monopolistic  level. 
No  doubt  the  trust  organizers  intended  to  take  full  advantage  of 
both  of  these  opportunities  in  the  endeavor  to  earn  satisfactory 
dividends  on  the  common  stock  as  well  as  on  the  preferred  stock, 
yet  if  the  conclusions  of  chapter  XIX  are  sound,  their  best  pros- 
pect of  success  was  through  the  raising  of  prices. 

That  the  common  stock  of  most  of  the  trusts  was  ''water," 
that  is,  had  no  actual  property  behind  it,  is  nowhere  seriously 
questioned.    The  following  well  authenticated  facts  bearing  on 

1  Bulletin  of  the  Department  of  Labor,  vol.  V,  p.  731. 

^  Industrial  Commission,  I,  p.  814. 

'  The  term  overcapitalization  as  here  employed  refers  to  a  capitalization 
in  excess  of  both  the  investment  and  the  reproduction  cost.  A  successful 
trust  might  be  able  to  earn  normal  returns  on  "watered"  stock,  yet  this 
indicates  not  so  much  the  reasonableness  of  the  capitalization  as  the  enjoy- 
ment of  monopoly  profits. 


270       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

some  leading  trusts  would  appear  to  "make  assurance  doubly 
sure." 

The  value  of  the  property  acquired  by  the  Steel  Corporation 
in  1901  was  the  subject  of  a  painstaking  study  by  the  Bureau  of 
Corporations.^  In  this  investigation  three  different  bases  were 
used, — the  investment  of  the  constituent  companies  at  the  time 
of  their  formation,  the  average  market  value  of  their  securities 
from  the  date  of  their  organization  to  the  close  of  1900,  and  the 
value  of  the  properties  as  evidenced  by  a  physical  valuation. 
The  conclusion  of  the  Bureau  was  that  the  common  stock  of  the 
Corporation,  amounting  to  36  per  cent  of  its  total  capitalization, 
was  water;  and  that  from  one-fifth  to  two-fifths  of  the  preferred 
stock,  this  stock  also  amounting  in  the  aggregate  to  36  per  cent  of 
the  total  capitalization,  was  water,  the  amount  of  the  over- 
capitalization depending  on  the  basis  of  valuation  employed. 
By  either  the  investment  or  the  physical  valuation  basis,  slightly 
over  50  per  cent  of  the  total  capitalization  had  no  assets  behind 
it;  and  by  the  market  value  of  the  securities  basis,  reflecting,  as 
it  did,  the  monopoly  profits  of  the  constituent  companies,  the 
percentage  was  43.  This  tremendous  overcapitalization,  proven 
in  the  case  of  the  Steel  Corporation,  was  characteristic  also  of 
the  earlier  steel  trusts,  as  is  established  in  the  report  of  the 
Bureau  of  Corporations.-  This  was  admitted  also  by  Judge 
W.  H.  Moore,  a  well-known  trust  promoter,  when  in  testimony 
before  the  Industrial  Commission  he  said:  "everybody  knows 
what  they  are  getting  when  they  get  common  stock;  they  know 
they  are  not  getting  anything  that  represents  assets."  ^ 

The  various  tobacco  trusts  were  also  heavily  overcapitalized. 
The  cigarette  trust  (the  original  American  Tobacco  Company) 
was  capitalized  at  $25,000,000.    The  Bureau  of  Corporations 

1  See  pp.  208-210. 

2  See  Report  on  the  Steel  Industry,  part  I,  pp.  127-133  (American  Steel 
and  Wire  Company);  pp.  133-136  (American  Tin  Plate  Company);  pp.  138- 
139  (American  Steel  Hoop  Company);  pp.  139-141  (American  Sheet  Steel 
Company) ;  pp.  141-144  (National  Tube  Company) ;  and  pp.  144-145  (Shelby 
Steel  Tube  Company).  See  also  Brief  for  the  United  States  (no.  481),  vol.  I, 
pp.  22,  26,  29,  31,  33. 

'  Industrial  Commission,  I,  p.  963. 


THE  EFFECT  OF  TRUSTS  ON  PRICES  271 

found  that  the  tangible  assets  of  the  constituent  companies 
amounted  to  $5,370,462  (including  $1,825,354  in  notes  of  the 
organizers),^  and  the  good  will  to  $8,954,892;  or  an  overcapitali- 
zation exceeding  $10,000,000.^  The  Continental  Tobacco 
Company  (the  plug  tobacco  trust),  after  acquiring  the  Liggett 
and  Myers  Tobacco  Company  in  1899,  had  a  capitalization  of 
$97,690,700,  one-half  preferred  stock  and  one-half  common.  The 
company  entered  $26,831,123  of  this  on  its  books  as  tangible 
assets,  and  the  balance  ($70,859,577)  as  intangible  assets.  The 
Bureau  declared  that  the  value  of  the  intangible  assets,  meas- 
ured on  a  cash  basis,  was  not  over  $16,664,867;  and  the  over- 
capitalization therefore  amounted  to  $54,194,710.^  Over  55  per 
cent  of  the  company's  securities  might  therefore  be  regarded  as 
water.  The  American  Snuff  Company  (the  snuff  trust)  was  also 
heavily  overcapitalized.  At  its  organization  in  1900  it  was 
capitalized  at  $23,001,700,  of  which  $12,000,000  was  preferred 
stock  and  $11,001,700  common.  The  Bureau  found  that  the 
tangible  assets  of  the  constituent  concerns  were  worth  $4,312,- 
728,  and  the  good  will  not  over  $7,689,000,  or  a  total  of  not  to 
exceed  $12,001,728.  All  of  the  common  stock,  therefore,  was 
water.^ 

Despite  their  excessive  capitalization  these  trusts  all  paid 
large  dividends  on  their  stock,  water  and  all.  Their  ability  to  do 
so  testified,  as  said  before,  not  to  the  reasonableness  of  the  capi- 
talization, but  to  the  possession  of  monopoly  earnings.  In  con- 
trast, the  American  Cigar  Company,  which  hoped  to  monopolize 
the  cigar  industry,  earned  only  a  moderate  return  on  a  capital- 
ization free  from  water,  yet  this  was  because  it  did  not  succeed 
in  effecting  a  monopoly  of  its  branch  of  the  business,  and 
it  was  therefore  unable  to  raise  prices  above  a  competitive 
level. 

Among  the  other  trusts  that  were  overcapitaHzed,  some  of 

1  Against  these  notes  an  entry  was  immediately  made  on  the  books  of  the 
company  to  surplus,  so  that  the  capital  and  surplus  amounted  to  $26,825,354. 

2  See  p.  123. 

^  Report  on  the  Tobacco  Industry,  part  II,  pp.  12,  99. 
*  Ibid.,  pp.  28-29. 


272        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

them  quite  heavily,  were  the  following:  the  American  Sugar 
Refining  Company,  ^  the  American  Can  Company,^  the  Dis- 
tilling and  Cattle  Feeding  Company  and  its  successors,^  the 
National  Starch  Manufacturing  Company  (the  starch  trust)  ,^ 
the  Glucose  Sugar  Refining  Company  (the  glucose  trust), ^  the 
Corn  Products  Company  (the  starch  and  glucose  trust)  ,"^  the 
Corn  Products  Refining  Company  (the  successor  to  the  Corn 
Products  Company),'  the  International  Paper  Company,^  the 
American  Bicycle  Company,^  the  American  Malting  Company, ^^ 
the  Asphalt  Company  of  America,^ ^  the  Mount  Vernon-Wood- 
berry  Cotton  Duck  Company,  ^^  the  National  Cordage  Company,i=^ 
the  National  Salt  Company,  ^^  the  National  Shear  Company,  ^^  the 
New  England  Cotton  Yarn  Company ,^^  the  Rubber  Goods 
Manufacturing  Company, ^^  the  United  States  Leather  Com- 
pany, ^^  and  the  United  States  Rubber  Company. ^^ 

Some  trusts,  on  the  other  hand,  have  been  capitalized  on  a 
moderate  basis.    Among  them  the  most  conspicuous  illustrations 

1  Industrial  Commission,  I,  p.  13  (Review  of  Evidence).  See  also  pp.  120- 
121. 

2  230  Fed.  Rep.  870-871,  877. 

^  Industrial  Commission,  I,  p.  14  (Review  of  Evidence). 

« Ibid.,  XIII,  p.  673. 

6  Brief  for  the  United  States  in  United  States  v.  Corn  Products  Refining 
Company  (no.  E-10-122),  p.  485;  and  Dewing,  Corporate  Promotions  and 
Reorganizations,  pp.  79,  532. 

6  Dewing,  op.  cit.,  pp.  89,  93-95- 

''Ibid.jpp.  106,  108-109. 

8  Industrial  Commission,  I,  pp.  409-410,  415-416,  419-420,  432-433,  441. 

9  Dewing,  op.  cit.,  pp.  254,  532. 
i"  Ibid.jpp.  278-279,  296,  532. 

"  Ibid.,pp.  432-433,  532. 

12  Ibid., pp.  342-343,  532. 

13  Industrial  Commission,  XIII,  p.  130;  Dewing,  op.  cit.,  pp.  123,  532. 

"  Industrial  Commission,  XIII,  pp.  249-250;  Dewing,  op,  cit.,  pp.  207- 
208,  532. 

"  Industrial  Commission,  I,  p.  1044. 

18  Dewing,  op.  cit.,  pp.  313-316,  325,  532. 

"  Industrial  Commission,  XIII,  pp.  37,  47. 

i«  Dewing,  op.  cit.,  pp.  20,  23,  532. 

w  Industrial  Commission,  XIII,  p.  48. 


THE  EFFECT  OF  TRUSTS  ON  PRICES  273 

are  the  Standard  Oil  Company/  the  International  Harvester 
Company,"  the  Pittsburg  Plate  Glass  Company,^  and  the  meat- 
packing companies.^ 

The  ability  of  the  trusts  to  charge  excessive  prices  and  to 
capitalize  the  increased  earning  power  thus  created  must  be 
ascribed  in  many  cases  to  the  protection  afforded  by  the  tariff. 
Had  it  not  been  for  the  prohibitions,  partial  or  complete,  imposed 
by  the  tariff,  foreign  competition  would  have  operated  to  prevent 
prices  in  this  country  from  being  raised  above  the  foreign  cost 
plus  transportation  expenses.  And  if  prices  could  not  be  much 
advanced  as  the  result  of  the  elimination  of  domestic  competi- 
tion, there  would  have  been  no  justification,  even  on  the  earning 
power  basis,  for  the  issuance  of  a  mass  of  watered  securities, 
unless  indeed  the  trust  should  prove  to  be  much  more  efficient 
than  the  producing  units  that  it  displaced.^  The  protective 
tari£f  thus  promoted  the  trust  movement  by  offering  to  the 
manufacturers  prospects  of  large  profits — profits  large  enough  to 
induce  them  to  overcome  their  inherent  repugnance  to  relin- 
quishing their  independence  and  the  control  of  their  own  busi- 
ness— and  by  offering  to  the  investing  public  a  chance  to  share  in 
the  speculative  gains. ^ 

However,  the  influence  of  the  tariff  must  not  be  exaggerated. 
Trusts  were  formed  in  industries  not  protected  by  tariff  duties  as 
well  as  in  industries  enjoying  such  artificial  support;  and  they 
were  formed  in  industries  in  which  such  protection  was  purely 
nominal  as  well  as  in  industries  in  which  the  trusts  required 

'  If  we  compare  the  capitalization  of  the  Standard  with  the  actual  invest- 
ment (exclusive  of  the  reinvestment  of  surplus  earnings)  it  was  overcapital- 
ized in  1906;  if  we  compare  it  with  the  cost  of  reproducing  the  property  on 
that  date  it  was  distinctly  undercapitalized.  See  Brief  for  the  United  States 
(no.  725),  vol.  II,  pp.  4-5. 

^  See  p.  236. 

'Industrial  Commission,  XIII,  pp.  227,  241. 

*  Report  of  the  Commissioner  of  Corporations  on  the  Beef  Industry, 
pp.  39-40- 

*  This  matter  is  discussed  in  ch.  19. 

*  The  tariff  also  furthered  the  trust  movement  by  intensifying  competition 
in  the  protected  industries.  On  this  point  see  Bullock,  Quarterly  Journal  of 
Economics,  15,  pp.  208-209. 


274       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

assistance  were  they  to  compete  successfully  with  foreign 
manufacturers.  Clearly  the  tariff  can  not  be  held  responsible 
for  the  formation  of  trusts  in  those  industries  in  which  the  effi- 
ciency of  American  manufacturers  was  so  pronounced  that 
domestic  prices  remained  lower  than  foreign  even  after  the 
elimination  of  competition  in  this  country.  The  truth  is  that 
the  causes  of  the  growth  of  monopoly  are  numerous  and  complex, 
and  the  most  that  can  be  said  with  respect  to  the  tariff  is  that 
in  many  instances  it  was  a  contributing  factor  of  considerable 
importance. 

So  much  for  conclusions  grounded  on  experience.  Let  us  next 
consider  on  the  basis  of  general  reasoning  what  is  the  probable 
effect  of  monopoly  on  prices. 

According  to  the  theory  of  monopoly  price,  a  monopohzed 
article  will  be  sold  at  the  price  that  yields  the  maximum  net 
profits.^  If  a  high  price  be  charged,  the  profit  per  unit  will  be 
large,  but  the  volume  of  sales  will  be  small,  unless  the  demand  be 
inelastic.  If,  on  the  other  hand,  a  low  price  be  charged,  the  profit 
per  unit  will  be  small,  but  the  volume  of  sales  will  be  large,  pro- 
viding the  demand  is  elastic.  Under  these  circumstances  the 
monopolist  (trust)  may  be  expected  in  the  absence  of  restraining 
factors — of  which  more  later — to  hit  upon,  through  a  process  of 
trial  and  error,  that  price  which  brings  in  the  greatest  net  revenue. 
What  that  price  will  be  will  depend,  as  stated  before,  on  the 
conditions  of  demand.  In  general,  a  high  price  will  be  more 
profitable  if  the  demand  is  inelastic,  that  is,  if  it  persists  despite 
high  prices;  and  a  low  price  will  be  more  profitable  if  the  demand 
is  elastic,  that  is,  if  it  increases  as  the  price  falls,  and  decreases  as 
the  price  rises.  What  will  be  the  most  profitable  price  will 
depend  also  on  the  conditions  of  cost.  If  the  cost  of  production 
rises  as  the  volume  of  output  increases,  the  tendency  will  be  to 
pursue  a  high  price  policy,  since  increased  business  occasions  a 
greater  expense  per  unit.  This  will  be  particularly  true,  if  at  the 
same  time  the  demand  is  inelastic.    If,  however,  the  cost  of  pro- 

'  For  a  more  extended  discussion  of  the  theory  of  nnonopoly  price,  see 
Taussig,  Principles  of  Economics  (1911),  I,  ch.  15;  Ely,  OutHncs  of  Eco- 
nomics (1916),  pp.  200-207;  and  Ely,  Monopolies  and  Trusts,  ch.  3. 


THE  EFFECT  OF  TRUSTS  ON  PRICES  275 

duction  falls  as  the  volume  of  output  increases,  the  tendency 
will  be  to  pursue  a  low  price  poHcy,  since  enlarged  business 
causes  a  reduced  expense  per  unit.  If  the  demand  be  elastic,  the 
monopolist  will  be  almost  certain  to  charge  comparatively  low 
prices.  If,  finally,  the  cost  be  neither  increasing  nor  decreasing, 
but  constant,  the  calculations  of  the  monopolist  will  be  more 
simple;  he  will  adjust  his  output  with  reference  solely  to  the 
demand,  choosing  that  price  that  promises  the  maximum  net 
returns. 

Such  being  the  principles  underlying  the  determination  of 
monopoly  price,  how  does  a  monopoly  price  compare  with  a 
competitive  price?  There  is  general  agreement  among  leading 
economists  that  a  monopoly  price  is  likely  to  be  higher  than  a 
competitive  price. ^  The  explanation  of  this  tendency  lies  in  the 
control  exercised  by  the  monopoly  over  the  supply.  Under 
competitive  conditions  the  price  of  an  article  tends  to  hover 
about  the  cost  of  production  (including  in  cost  a  normal  profit). 
If  the  price  rises  above  the  cost,  the  supply  increases  and  the 
price  falls  again,  provided  there  has  been  no  change  meanwhile  in 
the  conditions  of  demand;  and  if  the  price  falls  below  the  cost, 
the  supply  decreases  and  the  price  rises  again.  Under  monopoly 
conditions,  however,  the  price  of  an  article  does  not  tend  to  hover 
about  the  cost  of  production,  but  .at  a  point  somewhat  above; 
for  the  monopolist  can  limit  the  supply,  and  by  this  means  pre- 
vent prices  from  falling  to  a  level  determined  by  cost.  To  be 
sure,  the  monopoly  in  restricting  the  supply  and  advancing  the 
price  is  confronted  with  the  possibility  of  a  considerable  decline 
in  its  sales;  and  it  may  find  it  advantageous  to  pursue  a  moder- 
ate policy.  But  the  competitive  producer  charging  a  high  price 
will  not  only  suffer  a  reduction  in  his  sales  through  the  decline  in 
the  demand,  but  also  through  a  diversion  of  his  business  to  his 

^  Taussig,  Principles  of  Economics  (1911),  I,  p.  206;  Ely,  Monopolies  and 
Trusts  (1906),  p.  119;  Fisher,  Elementary  Principles  of  Economics  (1912), 
p.  330;  Carver,  Principles  of  Political  Economy  (1919),  p.  352;  Bullock, 
Introduction  to  the  Study  of  Economics  (1908),  p.  337;  Fetter,  The  Principles 
of  Economics  (1910),  p.  330;  Seligman,  Principles  of  Economics  (1910), 
p.  258;  Seager,  Introduction  to  Economics  (1905),  p.  498, 


276        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

competitors.  To  a  monopoly,  assuming  it  to  be  effective  and  to 
have  competition  well  under  control,  there  is  one  check  on  high 
prices,  whereas  to  a  competitive  producer  there  are  two.  It  is  of 
course  evident  that  an  individual  competitive  producer  can 
restrict  his  own  supply,  and  thus  raise  prices  somewhat,  yet  he 
can  not  ordinarily  by  such  means  enhance  his  profits.  The 
benefits  of  the  high  price  go  to  his  fellow  producers  who  continue 
production  in  undiminished  volume;  and  are  temporary  at  best, 
since  the  high  prices  stimulate  the  output.  To  the  consuming 
public  this  is  precisely  the  merit  of  the  competitive  system,  that 
under  it  a  particular  producer  can  not  augment  his  profits 
by  restricting  the  output.  A  monopoly,  on  the  other  hand, 
may  achieve  its  success,  not  by  increasing,  but  by  limiting 
production. 

The  monopoly  price,  it  should  be  observed,  may  be  no  higher, 
and  may  even  be  lower,  than  the  competitive  price,  if  the  mo- 
nopoly is  more  efficient  than  alternative  forms  of  business  organi- 
zation. The  monopoly  under  these  conditions  would  still  charge 
the  price  that  was  the  most  profitable  to  it,  but  this  price  might 
be  below  the  cost  of  production  (including  a  normal  profit)  to 
smaller  concerns.  Whether  this  is  to  be  anticipated  so  far  as 
industrial  monopolies  (trusts)  are  concerned  will  receive  con- 
sideration later.  ^ 

If  these  are  the  principles  upon  which  monopolies  proceed, 
how  does  it  happen  that  it  is  difficult  to  show  in  convincing 
fashion  the  whole  effect  of  trusts  on  prices?  The  explanation  is 
that  there  are  many  considerations  that  have  made  it  seem 
advisable  for  the  trusts  to  exercise  restraint  in  their  price  policy, 
with  the  result  that  they  have  not  advanced  prices  as  much  as 
might  be  anticipated  did  they  feel  entirely  secure  in  their  mo- 
nopolistic position. 

(i)  First  of  all  there  is  the  potential  competition  of  new 
concerns.  If  the  trust  is  too  greedy  for  profits  and  raises  prices 
unreasonably,  there  are  attracted  to  the  industry  a  host  of 
new  companies  anxious  to  participate  in  the  unusual  returns. 
During  the  early  Hfe  of  the  trust  movement  the  individual  trusts 

*  See  ch.  19. 


THE  EFFECT  OF  TRUSTS  ON  PRICES  277 

frequently  tried  to  do  away  with  this  competition  by  the  resort 
to  unfair  competitive  tactics,  notably  local  price  cutting,  railroad 
discriminations,  and  exclusive  dealing  requirements;  and  en- 
deavored through  threats  of  employing  such  practices  against 
all  would-be  competitors  to  prevent  new  concerns  from  ever 
getting  started.  Such  methods  resulted  in  the  destruction  of 
many  enterprises,  and  may  be  said  to  have  been  reasonably 
successful  in  many  instances.  Yet  they  were  not  always  used, 
and  even  when  used  they  were  by  no  means  always  effective. 
In  many  industries  the  trusts  found  themselves  overcome  by  the 
new  competition,  and  their  control  of  the  trade  speedily  dwindled 
away.  The  lesson  was  salutary,  and  the  trusts  that  survived 
pursued  a  more  farsighted  policy.  They  commonly  came  to  see 
the  inadvisability  of  charging  prices  so  high  that  new  concerns 
were  tempted  to  rush  headlong  into  the  business  hoping  to  get 
their  capital  back  in  a  few  years,  for  such  a  policy  led  to  serious 
overproduction  and  to  an  inevitable  decHne  in  prices.  They 
charged  instead  more  moderate  prices,  albeit  somewhat  above  a 
competitive  figure.  It  thus  appears  that  potential  (and  actual) 
competition  has  operated  on  occasion  to  prevent  the  trusts  from 
following  their  natural  course.  Yet  potential  competition  is  not 
a  satisfactory  or  adequate  regulator  of  trust  profits,  because  the 
strength  of  many  trusts  is  based  on  the  possession  of  some  special 
advantage  in  competition,  such  as  the  ownership  of  patents  or  a 
limited  natural  resource.  When  this  is  the  case,  there  are  effec- 
tive obstacles,  perhaps  insuperable  ones,  in  the  way  of  competi- 
tion, and  the  trust  need  exercise  little  restraint,  unless  there  be 
danger  of  hostile  legislation  of  one  kind  or  another.  Again,  in 
some  industries,  though  competition  is  not  artificially  restrained, 
it  may  be  backward  because  of  the  large  capital  needed  to  embark 
in  the  undertaking,  or  because  of  the  length  of  time  required  to 
construct  the  plant  and  to  establish  the  business.  In  such 
industries  the  possibility  of  reduced  prices  on  the  emergence  of 
competition  may  prevent  potential  competition  from  becoming 
actual  competition,  and  may  enable  the  trust  to  charge  prices 
that  are  considerably  above  the  cost  of  production,  and  thus  to 
secure  a  monopoly  profit. 


278        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

(2)  The  possibility  of  substituting  for  the  monopoUzed 
article  another  one  that  is  being  sold  at  a  more  reasonable  price  is 
a  factor  that  may  induce  trusts  to  refrain  from  charging  exorbi- 
tant prices.  If  the  price  of  kerosene  be  abnormally  high,  people 
will  use  gas  and  electricity;  and  no  doubt  the  competition  of 
these  fuels  has  operated  to  keep  down  the  price  of  kerosene,  and 
thus  outwardly  to  lend  support  to  the  argument  that  the  oil 
trust  has  reduced  its  price.  If  the  price  of  sugar  be  excessive, 
erstwhile  consumers  will  adopt  such  substitutes  as  glucose. 
In  industry,  manufacturers  may  employ  as  fuel  soft  coal,  hard 
coal  (the  steam  sizes),  gas,  oil,  and  the  like;  and  they  may  even 
burn  no  fuel,  but  run  their  machinery  with  electricity  generated 
by  water  power  hundreds  of  miles  away.  In  homes,  wood  is  also 
a  possible  substitute.  Steel,  lumber,  concrete,  stone,  and  brick 
all  compete  with  one  another  to  some  extent  in  building.  Rubber 
shoes  (or  soles)  may  be  substituted  for  leather  shoes;  and  enam- 
eled ware  and  tin  may  be  used  in  place  of  aluminum  cooking 
utensils.  Even  the  tin  can  trust  must  bear  in  mind  that  an 
excessive  price  for  tin  cans  may  hamper  the  fruit  preserving 
industry  in  its  competition  with  the  fruit  drying  industry.  How- 
ever, the  possibility  of  substitution  is  not  always  present,  or,  if 
present,  may  exercise  comparatively  little  influence.  What,  it 
may  be  asked,  are  effective  substitutes  for  watches,  cameras, 
cigarettes,  salt,  grain  binders,  and  steel  rails?  Moreover,  when 
the  competition  of  substitutes  is  effective,  there  is  an  incentive  to 
secure  control  over  the  allied  industry,  which  explains  the  en- 
trance of  Standard  Oil  capitalists  into  the  gas  industry,  and  the 
attempted  domination  of  the  substitutes  for  meat  by  the  leading 
meat-packers.  The  conclusion  would  appear  to  be  justified  that 
while  collateral  competition  may  impose  some  limitations  on 
monopoly  power,  it  by  no  means  insures  that  the  monopolized 
article  will  be  sold  at  a  reasonable  price,  and  it  is  thus  a  safe- 
guard of  limited  effectiveness. 

(3)  A  particular  trust  may  be  restrained  by  the  fact  that  its 
sales  are  made  in  large  part  to  another  trust,  or  possibly  to  an 
important  combination.  For  example,  a  copper  trust,  if  obliged 
to  sell  to  a  brass  trust,  might  meet  with  determined  resistance  to 


THE  EFFECT  OF  TRUSTS  ON  PRICES  279 

exorbitant  prices;  the  latter  by  withholding  purchases  might  well 
break  the  market.  A  tin  can  trust  in  such  fashion  might  secure 
relief  on  its  purchases  of  tin  plate.  However,  it  rarely  happens 
that  one  trust  is  the  principal  market  for  another.  The  shoe 
machinery  trust  and  the  cash  register  trust  buy  large  quantities 
of  steel,  yet  their  purchases  constitute  such  a  small  percentage  of 
the  total  that  such  action  as  they  individually  might  take  to 
reduce  the  price  charged  for  steel  by  a  steel  trust  would  be  of 
little  consequence.  So  it  would  be  with  the  purchase  of  cotton 
yarn  by  the  thread  trust,  and  of  steel  pipes  and  tubes  by  the 
oil  trust.  It  is  precisely  because  of  their  limited  control  over 
the  affairs  of  other  trusts  that  some  of  them  make  for  themselves 
the  articles  which  they  would  otherwise  have  to  secure  from 
their  fellow  trusts.  This  explains  in  large  measure  why  the 
oil  trust,  the  tobacco  trust,  and  many  others  make  their  own 
tin  cans  instead  of  buying  them  from  the  American  Can  Com- 
pany. We  must  conclude  that  the  balance  of  power  among 
trusts,  though  it  protects  the  consumer  in  part,  is  not  an  effective 
bar  against  excessive  prices  of  trust  made  goods. 

(4)  The  disinclination  to  arouse  public  opinion  also  plays  its 
part,  and  no  doubt  a  considerable  one.  The  people,  if  sufficiently 
antagonized,  will  repeal  favoring  legislation  or  pass  restrictive 
laws.  Many  trusts  have  been  protected  against  foreign  competi- 
tion by  protective  duties;  but  the  trust  that  uses  these  duties  as 
an  excuse  for  unreasonable  prices  faces  the  danger  of  a  removal 
of  its  protection.  Other  trusts  are  founded  on  patent  monopolies 
permitted  by  the  government;  but  the  patent  laws  can  be  re- 
vised, if  it  seems  desirable.  But  not  only  may  favoring  legisla- 
tion be  repealed,  but  regulative  laws  may  be  passed.  At  the 
present  time  (191 9)  bills  to  regulate  the  meat  industry  are  re- 
ceiving the  serious  consideration  of  Congress;  and  the  suggestion 
at  one  time  or  another  has  been  soberly  made  that  the  oil  and  the 
steel  industries  (and  others)  are  essentially  public  service  corpo- 
rations, and  should  be  regulated  as  such.  Indeed,  a  considerable 
body  of  public  opinion  favors  the  regulation  of  the  prices  of  all 
monopolized  articles.  Another  considerable  group  advocates 
public  ownership  of  natural  resources,  a  step  that  would  be  of 


2 So        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

particular  concern  to  some  ten  important  trusts.  In  view  of 
these  contingencies  it  is  likely  that  the  trust  managers,  with 
their  fingers  on  the  public  pulse  and  with  an  eye  to  the  continued 
enjoyment  of  their  strategic  position,  will  refrain  from  pressing 
their  advantage  to  the  fullest;  and  their  prices  will  not  in  the 
future,  as  they  have  not  in  the  past,  conform  rigidly  to  the 
principles  of  monopoly  price  as  above  laid  down. 

(5)  A  trust,  it  has  been  said,  may  be  influenced  by  a  sense  of 
equity  and  reasonableness;  it  may  desire  to  have  the  good  will  of 
the  dealers  and  the  public,  and  thus  may  not  take  advantage  of 
their  necessities.  The  steel  trust,  for  example,  fixed  the  price  of 
steel  rails  at  $28  per  ton,  and  charged  no  more  than  this  during 
periods  of  prosperity,  when  market  conditions  would  have 
enabled  it  to  get  more.  In  this  particular  instance  the  price  was 
fixed  at  a  very  high  level  to  begin  with,  hence  this  is  hardly  an 
illustration  of  equitable  dealing.  Yet  it  is  conceivable  that  a 
trust,  even  though  created  in  an  anti-social  spirit,  might  come 
under  the  leadership  of  managers  of  a  dififerent  sort, — managers 
desirous  of  charging  only  a  fair  price.  Conceivable  though  it  be,  it 
is  unlikely,  since  even  under  the  competitive  regime  it  is  regarded 
as  proper  to  charge  what  the  public  is  willing  to  pay;  and  why 
should  a  monopoly  take  any  less?  The  fact  would  appear  to  be 
that  in  so  far  as  trusts  (or  their  managers)  adopt  a  spirit  of 
reasonableness  it  is  because  such  a  course  is  the  one  best  calcu- 
lated to  secure  for  them  the  good  will  of  the  trade  and  of  the 
consuming  public,  and  thus  to  prolong  their  enjoyment  of 
moderate  monopoly  profits. 

(6)  The  trust  because  of  inert  management  may  not  try  to 
secure  the  maximum  net  profit.  Unwilling  to  meet  the  attacks  of 
competitors  and  of  politicians,  it  may  hesitate  to  exploit  the 
public,  and  may  rest  satisfied  with  a  moderate  profit,  perhaps 
little,  if  any,  above  a  competitive  level.  Under  these  circum- 
stances, the  control  of  the  business  might  soon  be  sought  by  more 
aggressive  and  forceful  interests,  alive  to  their  opportunities,  and 
able  to  make  handsome  returns  even  after  paying  a  good  price 
for  the  property.  Yet  the  owners  of  the  business,  notwithstand- 
ing the  inertness  of  the  management,  might  refuse  to  sell,  hence 


THE  EFFECT  OF  TRUSTS  ON  PRICES  281 

there  can  be  no  certainty  that  each  trust  will  be  managed  along 
the  lines  offering  the  maximum  profit. 

(7)  A  trust  may  fail  to  charge  the  price  that  produces  the 
greatest  net  revenue  through  sheer  inability  to  ascertain  what 
that  price  is.  Among  the  unknown  factors  in  the  problem  are 
the  amount  of  the  demand  at  various  prices  and  the  extent  to 
which  the  cost  of  production  will  increase  or  decline  as  the  out- 
put varies.  The  matter  is  complicated  because  the  demand 
schedule,  even  if  it  could  be  worked  out  for  any  given  date, 
changes  from  time  to  time.  The  demand  for  any  particular 
article  depends  on  the  state  of  business,  on  the  mood  of  the  con- 
suming public,  and  on  the  distribution  of  purchasing  power 
among  the  community.  If  business  is  good,  the  demand  will 
normally  be  great,  and  a  high  price  may  yield  the  maximum  net 
profit;  and  conversely,  when  a  period  of  depression  sets  in.  If 
the  public  is  extravagantly  minded,  as  at  present  (1919),  a 
proportionately  large  outlay  will  be  made  for  consumer's  goods, 
and  their  monopoly  price  could  well  be  high ;  and  conversely  for 
those  articles  that  are  in  demand  when  thrift  is  in  vogue.  Again, 
if  there  occurs  a  marked  change  in  the  distribution  of  the  com- 
munity's purchasing  power,  so  that  the  bondholders  and  the 
salaried  classes  have  less  and  the  working  people  more,  the 
trusts  that  produce  articles  desired  by  those  of  increased  pur- 
chasing power  could  raise  their  prices,  whereas  those  trusts  that 
produced  articles  desired  by  individuals  of  reduced  purchasing 
power  might  be  compelled  to  reduce  their  prices.  There  may  be 
other  matters  that  complicate  the  problem;  but  enough  has  been 
said  to  show  that  at  best  all  that  a  trust  can  hope  to  do  is  to 
approximate  the  most  profitable  price.  Though  the  price  that  it 
charges  will  doubtless  be  somewhat,  perhaps  considerably, 
above  the  competitive  price,  it  will  not  be  fixed,  we  may  premise, 
as  the  result  of  a  mathematical  formula  at  the  exact  point  that 
would  actually  prove  to  be  the  most  remunerative. 

The  foregoing  considerations  make  it  evident  that  the  price 
policy  of  the  trusts  has  been  less  grasping  than  might  have  been 
expected  of  an  agency  formed  largely  for  the  express  purpose  of 
suppressing  competition.    They  also  demonstrate  that  though 


282       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

there  are  certain  forces  at  work  to  safeguard  the  pubHc  interest, 
these  forces  are  not  adequate  of  themselves,  since  they  do  not 
prevent  the  trusts  from  charging  prices  higher  than  the  public 
would  pay  under  competitive  conditions,  assuming  that  industry 
is  as  economically  conducted  under  the  latter  state  as  under  the 
first.  As  to  legalizing  trusts  in  the  hope  of  satisfactorily  regu- 
lating them  and  their  prices,  it  will  be  shown  in  chapter  XX 
that  price  regulation  is  a  problem  of  the  first  magnitude  and 
one  whose  successful  solution  is  problematical. 


CHAPTER  XII 

PROMOTERS'  PROFITS  IN  THE  ESTABLISHMENT 
OF  TRUSTS 

In  this  chapter  it  is  proposed  to  indicate  by  a  study  of  in- 
dividual trust  promotions  the  importance  of  promoters'  profits 
as  a  cause  contributing  to  the  formation  of  trusts. 

The  function  and  work  of  the  promoter  have  been  well 
described  elsewhere/  and  need  not  be  dwelt  upon  here  in  any 
detail.  Briefly,  in  a  t>T3ical  trust  promotion  the  promoter  secured 
options  on  the  plants  that  were  to  be  combined;  arranged, 
usually  through  an  underwriting  syndicate,  for  the  raising  of  the 
necessary  funds;  organized  a  corporation  to  acquire  the  plants; 
and  provided  for  the  transfer  of  the  plants  (or  securities)  to  the 
trust. 

In  effecting  a  trust  promotion  the  promoter  had  first  to 
obtain  options  on  the  properties  (or  the  securities),  otherwise 
the  owners  would  in  all  likehhood  have  advanced  their  purchase 
price  as  it  became  evident  that  the  trust  was  to  be  formed.  The 
promoter,  to  be  sure,  might  have  bought  all  the  properties  for 
cash,  but  this  would  have  involved  a  great  deal  of  risk,  and 
would,  moreover,  have  been  difficult  to  finance.  In  fact,  it  was 
rarely  done.  Second,  he  had  to  secure  financial  backing,  since 
the  trust  required  working  capital  (it  did  not  ordinarily  acquire 
the  working  capital  of  the  constituent  companies),  and  since 
some  owners  would  almost  certainly  demand  cash  for  their 
plants,  refusing  to  accept  securities,  the  value  of  which  was  more 
or  less  problematical.  -    Generally  speaking,  however,  the  amount 

iSee  Meade,  Trust  Finance,  chs.  4-6;  Haney,  Business  Organization 
and  Combination,  ch.  18;  and  Lough,  Corporation  Finance,  chs.  12-14. 

2  This  cash  the  promoter  usually  secured  through  the  sale  of  stock  to  an 
underwriting  syndicate.  Because  of  the  risk  that  the  stock  could  not  be  dis- 
posed ot  at  a  profit,  the  syndicate  was  wont  to  insist  on  a  commission  in  the 
form  of  bonus  stock. 

283 


284        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

of  cash  required  to  buy  out  the  manufacturers  was  comparatively 
small.  Ordinarily  the  promoter  offered  them  at  least  one  share 
of  preferred  stock  and  one  of  common  stock  in  lieu  of  $100  in 
cash;  ^  and  tempted  by  the  proiits  that  were  anticipated  for  the 
trust,  the  manufacturers  commonly  agreed  to  take  the  stock. 
Had  they  not  been  willing  to  take  stock  very  few  trusts  would 
have  been  formed.  The  promoters  would  have  been  unable  to 
supply  the  large  amount  of  cash  that  would  have  been  required,'^ 
and  the  public  would  have  hesitated  to  buy  securities  that  were 
unacceptable  to  the  manufacturers,  who  were  acquainted  with 
the  industry  and  its  prospects.  Third,  the  promoter  had  to 
organize  a  new  company  to  acquire  the  plants  or  the  stocks  of 
the  underlying  companies,  unless,  indeed,  one  of  the  existing 
companies  was  used  for  this  purpose.  In  any  event  the  capital- 
ization of  the  new  (or  reorganized)  company  was  likely  to  be 
determined  by  the  promoter,  with  the  advice  of  the  financiers. 
Finally,  he  had  to  arrange  for  the  transfer  of  the  properties  or 
securities  of  the  separate  companies  to  the  newly-organized 
corporation  in  exchange  for  its  securities  or  for  cash,  or  both. 
Sometimes  the  corporation  gave  to  the  promoter  all  or  part  of 
its  stock  in  return  for  an  agreement  upon  the  part  of  the  pro- 
moter to  deliver  to  it  the  plants  or  control  of  the  companies 
owning  the  plants.  In  that  case  the  size  of  the  promoter's 
profit  depended  on  how  favorable  a  bargain  he  was  able  to 
drive  with  the  separate  manufacturers.  At  other  times  the 
corporation  offered  to  exchange  its  securities  for  those  of  the 
constituent  companies  at  a  definite  ratio,  the  promoter  taking 
his  profit  perhaps  in  the  form  of  a  stock  commission.  In  either 
event  there  would  probably  be  issues  of  stock  to  the  financiers 
or  bankers  who  agreed  to  supply  the  requisite  funds. 

It  is  clear,  therefore,  that  the  organization  of  a  trust  usually 
involved  large  issues  of  stock  to  a  great  variety  of  individuals. 
These  included:  (i)  the  promoters  who  purchased  or  secured 

>The  preferred  stock  usually  represented  the  value  of  the  i)lants;  the 
common  stock  the  anticipation  of  monopoly  gains. 

2  The  financiers  would  have  balked,  of  course,  at  putting  up  cash  to  finance 
a  proposition  that  the  manufacturers  mistrusted. 


PROMOTERS'  PROFITS  AND  TRUSTS  285 

options  on  the  properties,  and  who  devised  the  financial  plan; 
(2)  the  financiers  who  raised,  or  agreed  to  raise,  the  necessary 
funds;  (3)  the  lawyers  who  incorporated  the  company,  and 
attended  to  the  legal  aspects  of  the  promotion;  (4)  the  manu- 
facturers who  were  generally  unwilling  to  sell  unless  they  re- 
ceived stock  much  in  excess  of  the  value  of  their  properties; 
and  (5)  the  public,  which  was  expected  to  buy  the  stock,  and 
which  at  times  had  to  be  tempted  by  an  offer  of  common  stock 
as  a  bonus.  It  frequently  happened  that  the  promoter  was  also 
a  financier,  that  is,  was  a  member  of  the  underwriting  syndicate, 
and  less  frequently  perhaps  he  was  also  a  manufacturer.  His 
profits,  therefore,  were  often  a  composite.  Because  of  the 
difiiculty,  if  not  impossibility,  of  determining  in  individual 
cases  of  trust  promotion  to  what  extent  the  profits  of  the  pro- 
moter were  a  reward  for  true  promotion  services,  to  what  extent 
a  reward  for  financial  services,  and  to  what  extent  for  legal  and 
miscellaneous  services,  we  shall  in  general  in  this  chapter  use  the 
term  promoters'  profits  to  indicate  the  profits  made  by  the 
promoters,  financiers,  and  lawyers,  but  not  including  those 
additional  profits  that  were  realized  by  these  groups  when  they 
were  also  owners  of  stock  in  the  companies  that  were  combined. 
There  can  be  no  doubt  that  the  promoter,  when  he  was  also  a 
manufacturer,  may  have  been  animated  fully  as  much  by  a 
desire  to  secure  profits  in  the  role  of  manufacturer  as  in  the  role 
of  promoter,  yet  this  motive  was  by  no  means  always  present, 
since  many  trusts  were  promoted  by  ''outsiders."  Under  this 
use  of  the  term  promoters'  profits,  it  will  be  observed,  we  are 
underestimating  rather  than  exaggerating  the  importance  of 
promoters'  profits  as  an  inducement  toward  the  formation  of 
trusts.  However,  it  will  still  be  true  in  many  instances  that 
the  inducement  remained  sufficiently  great  to  give  a  distinct 
fillip  to  the  trust  movement. 

The  largest  trust  and  the  one  in  which  promoters'  profits 
figured  most  prominently  is  the  United  States  Steel  Corporation. 
This  company  represented  a  union  under  the  holding  company 
plan  of  a  group  of  concerns,  some  of  which  were  merely  combi- 
nations and  others  of  which  were  trusts.    The  capitalization  of 


286        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  Steel  Corporation  thus  allowed  for  the  remuneration  of  two 
sets  of  promoters,  those  that  had  organized  the  constituent 
companies  of  the  Corporation,  and  those  that  organized  the 
Corporation  itself.    The  two  cases  will  be  described  separately. 

Some  idea  of  the  profits  secured  by  the  promoters  of  the  steel 
combinations  and  trusts  of  1898  to  1900  may  be  gained  by  an 
examination  of  the  table  on  page  287,  showing  the  amount  of 
stock  representing  promotion  charges,  the  value  of  this  stock 
based  on  average  market  quotations  during  1899  to  1900,  and 
the  percentage  that  this  stock  was  of  the  total  issue.^  It  should 
be  noted  that  the  amount  of  stock  left  in  the  hands  of  the 
promoters  was  not  all  profit,  since  usually  the  promoters  had  to 
give  a  part  of  this  stock  (or  cash)  to  meet  certain  expenses 
incurred  in  the  promotion.  In  general,  however,  such  expenses 
were  small. 

Even  a  cursory  examination  of  the  table  makes  it  clear  that 
the  promoters'  profits  were  enormous.  The  promoters  of  the 
eight  concerns  for  which  data  were  available  retained  as  their 
reward  for  promotion  services  some  $63,000,000  of  stock,  or 
over  one-tenth  of  the  total  issued  stock  (if  we  excluded  the 
Carnegie  Company,  in  the  organization  of  which  there  were  no 
promoters'  profits,  the  ratio  would  be  more  than  one-eighth). 
The  market  value  of  this  stock,  based  on  the  average  quota- 
tions during  1S99  to  1900,  was  over  $28,000,000.  Its  value  based 
on  the  highest  quotations  of  the  respective  securities  during 
this  same  period  was  $40,549,188,  and  based  on  the  lowest 
quotations,  was  $19,829,959.  While  the  promoters  could  not 
have  unloaded  all  of  their  stock  at  the  highest  quotation,  it  is 
improbable  that  they  would  have  sold  at  the  mininum  figure 
for  the  two  year  period.  If  we  assume  that  the  promoters 
disposed  of  all  their  stock  prior  to  1901,  the  profits  of  promo- 
tion were  at  least  $20,000,000;  -  if  we  assume  that  they  did  not 

1  Report  of  the  Commissioner  of  Corporations  on  the  Steel  Industry,  part 
I,  pp.  126,  129,  133,  136,  138,  140,  144,  145,  170,  176-179-  Referred  to  here- 
after in  this  chapter  as  Report  on  the  Steel  Industry. 

-These  arc  pure  profits  of  promotion;  they  do  not  include  such  indirect 
profits  as  the  promoters  might  have  made  through  the  sale  of  securities  given 


PROMOTERS'  PROFITS  AND  TRUSTS 


287 


Ratio  of 

stock  repre- 

Value based 

senting 

Common  stock 

on  average 

promotion 

representing 

market  price 

charges  to 

Company 

promotion 

during 

issued  cap- 

charges 

1899-igoo  1 

ital  stock 
{including 
preferred) 

National  Tube  Co      

$20,000,000 

$  9,744,000 

25.0 

American  Steel  and  Wire  Co. . 

11,600,000 

5,958,160 

12 

9 

American  Tin  Plate  Co 

10,000,000 

3,477,000 

21 

7 

American  Bridge  Co 

7,250,000 

3,181,300 

II 

9 

National  Steel  Co 

5,000,000 

2,083,500 

8 

6 

American  Steel  Hoop  Co 

5,000,000 

1,605,500 

15 

I 

Federal  Steel  Co         

4,456,811  - 

2,455,972 

4 

■; 

American  Sheet  Steel  Co 

3 

Shelby  Steel  Tube  Co 

4 

Carnegie  Co 

none  * 

Total 

63,306,811 

28,145,432 

10. 1  * 

dispose  of  all  of  their  stock — we  know  that  they  did  not — their 
possible  profits  were  much  greater,  since  upon  the  organization 
of  the  Steel  Corporation  they  were  allowed  to  exchange  their  old 
stock  for  a  greater  amount  of  stock  in  the  Corporation.'  In  any 
event  the  profits  were  sufficiently  large  to  tempt  daring  pro- 
moters to  take  advantage  of  an  opportunity  to  ''get  rich  quick," 

to  them  in  return  for  cash  or  in  return  for  the  securities  that  they  held  in  the 
companies  that  were  combined. 

1  In  the  case  of  companies  not  organized  until  late  in  1899  or  early  in  1900 
quotations  are  from  the  date  of  organization  to  the  close  of  1900. 

2  Includes  $857,192  of  preferred  stock. 

3  Amount  unknown,  but  probably  large.    See  Report  on  the  Steel  Industry, 

part  I,  pp.  140,  178- 

■*  Amount  unknowm,  but  apparently  small.    See  ibid.,  pp.  144,  179- 

5  See  ibid.,  p.  179. 

6  j^.^  per  cent  if  we  did  not  include  the  capital  stock  ($160,000,000)  of 
the  Carnegie  Company. 

^  Except  in  the  case  of  the  American  Steel  Hoop  Company  and  the  Ameri- 
can Sheet  Steel  Company. 


288       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

whether  or  no  the  product  of  their  daring  subsequently  demon- 
strated its  fitness  to  survive  in  a  business  world  that  is  harassed 
under  normal  conditions  by  the  pressure  of  new  capital  seeking 
investment. 

The  promoters'  profits  realized  in  these  early  combinations 
and  trusts  in  the  steel  industry,  large  as  they  were,  were  eclipsed 
by  those  obtained  by  the  promoters  of  the  United  States  Steel 
Corporation.  The  syndicate  which  undertook  to  secure  a  major- 
ity of  the  stock  of  the  eight  companies  originally  acquired  by  the 
Corporation  incurred  cash  expenses  of  $28,000,000,  of  which 
amount  $25,000,000  went  to  the  Corporation  for  working  capi- 
tal. In  return  for  this  outlay  and  its  underwriting  services  the 
syndicate  was  given  by  the  Corporation  a  total  of  1,299,975 
shares  of  stock  (half  preferred  and  half  common),  having  a 
par  value  of  $129,997,500.  On  this  stock  the  syndicate  re- 
alized about  $90,500,000.^  Deducting  the  cash  expenditures 
($28,000,000),  it  is  evident  that  the  syndicate  made  a  profit  of 
$62,500,000.  Of  this  amount  one-fifth  went  to  the  firm  of  J.  P. 
Morgan  and  Company,  tlie  syndicate  managers,  for  their  serv- 
ices; and  the  balance  ($50,000,000)  was  distributed  among  the 
members  of  the  underwriting  syndicate,  including  the  Morgan 
firm.-  It  is  hardly  necessary  to  point  out  that  the  possibility  of 
making  such  large  profits  constitutes,  in  itself,  a  distinct  induce- 
ment to  the  formation  of  trusts. 

This  huge  compensation  to  the  S3aidicate  was,  according  to  the 
Bureau  of  Corporations,  greatly  in  excess  of  a  reasonable  pay- 
ment; and  particularly  so  in  view  of  the  reserved  right  of  the 
syndicate  managers  to  abandon  the  transaction  at  their  own 
discretion.^  The  syndicate  merely  undertook  to  acquire  the 
securities  of  various  steel  companies;  it  did  not  guarantee  to  do 
so.  It  should  be  noted,  moreover,  that  while  the  syndicate 
subscribers  stood  liable  to  raise  $200,000,000  upon  request  of 
the  syndicate  managers,  it  was  generally  understood  that  they 
would  not  be  called  upon  for  more  than  $25,000,000  in  cash; 

'  Report  on  the  Steel  Industry,  part  I,  p.  244. 
^  Ibid.,  i)p.  244,  248. 
*  Ibid., pp.  245-246. 


PROMOTERS'  PROFITS  AND  TRUSTS  289 

and  this,  in  fact,  was  all  that  they  contributed,  except  some 
$3,000,000  for  organization  expenses.  The  Bureau  of  Corpora- 
tions, in  fact,  alleged  that  this  "large  nominal  obligation  of  the 
syndicate  subscribers  to  the  syndicate  managers  apparently 
was  determined  upon  in  part  with  a  view  to  disarming 
subsequent  criticism  of  the  enormous  compensation  which  it 
received. "  ^ 

From  the  point  of  view  of  the  public  it  is  clear  that  it  would 
be  necessary  to  charge  excessive  prices  for  iron  and  steel  prod- 
ucts, if  dividends  were  to  be  paid  on  the  inordinate  amount  of 
stock  given  to  the  promoters  of  the  Corporation,  not  to  mention 
dividends  on  that  part  of  the  stock  of  the  Corporation  given  to 
the  promoters  of  the  constituent  companies  (or  their  successors) 
in  return  for  the  stock  held  by  them.  The  matter  is  important, 
since  some  $150,000,000  of  the  stock  of  the  Corporation,  or 
nearly  one-seventh  of  its  total  stock,  was  issued,  directly  or 
indirectly,  to  promoters  and  underwriters.^ 

The  American  Tobacco  Company  (the  cigarette  trust)  was 
organized  in  1890  as  a  consolidation  of  five  of  the  leading  manu- 
facturers of  cigarettes.  Since  the  manufacturers  were  them- 
selves the  organizers,  there  were  no  promoters'  profits  as  we 
have  employed  the  term.  At  that  early  date  it  was  not  common 
for  trusts  to  be  formed  by  "promoters";  and  the  number  of 
manufacturers  being  so  few,  it  was  comparatively  easy  to  arrive 
at  an  agreement.  There  was,  however,  a  very  marked  over- 
capitalization in  the  organization  of  the  trust.  The  capitaliza- 
tion of  the  company  was  $25,000,000,  of  which  $15,000,000  was 
common  stock  and  $10,000,000  preferred.  The  value  of  the 
assets  acquired  did  not  exceed  $14,400,000.^  The  capitalization 
thus  exceeded  the  assets  (including  good  will)  by  at  least  $10,- 
600,000.  The  establishment  of  a  high  degree  of  monopoly 
control,  however,  made  it  possible  for  the  company  to  earn  ap- 
proximately 20  per  cent  on  its  common  stock,  water  and  all. 
Enormous  profits  were  thus  realized  by  the  promoters  of  this 

1  Report  on  the  Steel  Industry,  part  I,  pp.  245-246. 

2  See  Report  on  the  Steel  Industry,  part  I,  p.  251. 

3  Cf.  p.  271. 


290       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

company,  but  the  profits  were  realized  as  manufacturers  rathei 
than  as  professional  promoters. 

The  Continental  Tobacco  Company  (the  plug  tobacco  trust) 
was  organized  in  189S.  This  company  was  very  heavily  over- 
capitalized, but,  as  with  the  American  Tobacco  Company, 
nearly  all  of  its  securities  went  to  the  owners  of  the  eleven  plants 
that  were  combined.  Inasmuch  as  five  of  these  eleven  plants 
belonged  to  the  American  Tobacco  Company,  and  inasmuch  as 
this  concern  had  been  conducting  a  severe  competitive  campaign 
to  force  its  competitors  into  a  combination,  there  was  less  occa- 
sion than  usual  for  resort  to  a  promoter,  who  should  undertake 
the  task  of  inducing  the  separate  owners  to  combine  their  in- 
terests. 

Though  promoters'  profits  did  not  figure  prominently  in  the 
organization  of  the  plug  tobacco  trust,  they  were  nevertheless 
present.  The  firm  of  Moore  and  Schley,  well-known  bankers 
and  brokers,  secured  cash  options  on  four  important  concerns, 
producing  among  them  nearly  one-quarter  of  the  output  that 
went  into  the  trust  in  1898.^  The  purchase  price  stipulated  in 
the  option  agreements  was  $8,477,000.  The  bankers  (Moore 
and  Schley)  also  raised  $2,751,400  in  cash,  to  enable  the  Conti- 
nental Company  to  take  care  of  its  promotion  and  other  ex- 
penses.^ For  these  properties  and  the  cash  the  Continental 
Company  gave  $25,025,000  in  stock  (one-half  preferred  and 
one-half  common),  and  $365,500  in  cash.^  The  bankers  in  turn 
transferred  $19,522,200  of  the  stock  and  all  of  the  cash  to  the 
owners  of  the  four  plants;  and  retained  as  their  pay  $5,502,800 
in  stock,  half  preferred  and  half  common.  While  the  bankers 
doubtless  incurred  a  few  incidental  expenses,  it  is  substantially 
correct  to  say  that  their  profits  on  the  transaction  were  the 
realizable  value  of  this  stock  minus  the  cash  ($2,751,400)  that 

*  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  I,  p.  99;  part  II,  p.  107. 

2  Report  on  the  Tobacco  Industry,  part  I,  pp.  101-102. 

'Ibid.,  part  II,  p.  107.  The  cash  payment  represented  interest  on  the 
purchase  price  during  the  period  that  intervened  between  the  signing  of 
the  option  and  the  transfer  of  the  plants  to  the  Continental  Company. 


PROMOTERS'  PROFITS  AND  TRUSTS  291 

they  raised.  The  market  value  of  this  stock  during  the  three 
years  of  the  life  of  the  company — a  reorganization  was  effected 
in  1901 — based  on  the  minimum  and  maximum  quotations 
ranged  between  $2,476,260  and  $5,370,732.  On  this  basis,  had 
they  sold  at  the  minimum  quotations  (which  is  quite  unhkely) 
they  would  have  sustained  a  loss  of  $275,140;  had  they  sold  at 
the  maximum  quotations  (which  is  equally  unlikely)  their 
profits  would  have  been  $2,619,332.^  On  the  other  hand,  if 
they  refrained  from  selling  during  1899-1901  they  would  have 
been  in  a  position  to  participate  in  the  reorganization  of  1901 
(when  the  American  Tobacco  Company  and  the  Continental 
Tobacco  Company  were  combined),  in  which  event  new  oppor- 
tunities for  profit  would  have  presented  themselves.  It  is 
probable,  therefore,  that  the  bankers  made  a  handsome  profit; 
but  it  is  certain  that  the  possibility  of  realizing  a  profit  for  the 
promoters  as  such  had  little  to  do  with  the  organization  of  the 
plug  tobacco  trust. 

The  syndicate  of  bankers  and  manufacturers  that  secured  an 
option  on  the  Liggett  and  Myers  Tobacco  Company,  the  largest 
plug  tobacco  concern  outside  of  the  trust,  also  made  a  large 
profit  through  its  sale  to  the  Continental  Tobacco  Company;  in 
fact,  it  acquired  the  Liggett  concern  largely  for  that  purpose.  Yet 
since  this  syndicate,  though  composed  in  large  measure  of  finan- 
cial and  banking  interests,  was  the  actual  owner  of  the  properties 
that  it  conveyed  to  the  trust,  its  gains  may  not  be  regarded  as 
true  promoters'  profits,  but  rather  as  profits  received  as  an 
owner  of  property  that  was  indispensable  to  the  trust. 

In  addition  to  the  cigarette  and  plug  tobacco  trusts  a  number 
of  other  companies  with  monopolistic  aspirations  were  formed  in 
the  tobacco  industry.  These  include  the  American  Snuff  Com- 
pany (1900);  the  American  Cigar  Company  (1901);  the  Consoli- 
dated Tobacco  Company  (1901) ;  and  the  new  American  Tobacco 
Company  (1904).  In  not  one  of  these  combinations,  however, 
does  it  appear  that  any  stock  went  to  promoters  or  bankers  for 
promotion  services.  The  absence  of  promoters'  profits  in  the 
organization  of  the  first  two  of  these  combinations  was  probably 
1  Neglecting  dividends  and  carrying  charges  in  each  case. 


292        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

due  to  the  fact  that  the  concerns  that  were  combined  were  so  few 
in  number  that  the  owners  were  able  to  come  together  and  effect 
an  agreement  among  themselves;  and  in  the  last  two  to  the  fact 
that  these  combinations  represented  largely  a  rearrangement  of 
securities,  no  new  concerns  being  immediately  brought  in.  On 
the  whole,  therefore,  it  is  correct  to  say  that  promoters'  profits 
have  had  surprisingly  little  to  do  with  the  formation  of  trusts 
in  the  tobacco  industry. 

The  American  Can  Company  (the  tin  can  trust)  was  organized 
in  1 901  with  an  issued  capital  stock  of  $82,466,600,  half  preferred 
and  half  common.  Of  this  stock  $78,000,000,  equally  divided 
between  preferred  and  common  stock,  was  given  to  the  promot- 
ers in  exchange  for  some  ninety-five  plants  on  which  the  promot- 
ers held  options  and  for  $7,000,000  in  cash  raised  by  them.^  The 
promoters  paid  for  the  plants  about  $23,500,000,  either  in  cash 
or  in  securities  practically  the  equivalent  of  cash.^  Thus,  when 
the  manufacturers  took  stock — most  of  them  did,  for  otherwise 
the  combination  could  not  have  been  formed — they  received  one 
share  of  preferred  and  one  share  of  common  for  each  $100  of  the 
purchase  price.  On  the  assumption  that  all  of  the  manufacturers 
took  stock,  the  promoters  gave  some  $47,000,000  in  stock  for 
the  plants,  and  had  $31,000,000  left.^  Of  this  amount  about 
$14,000,000  might  properly  be  regarded  as  payment  for  the 
$7,000,000  in  cash  turned  over  to  the  American  Can  Company 
as  working  capital.  Their  actual  profits,  therefore,  were  the 
realizable  value  of  $17,000,000  in  stock,  half  preferred  and  half 
common.  How  much  the  promoters  actually  reaHzed  there  is 
no  means  of  knowing,  but  the  market  value  of  this  $17,000,000 
in  stock  during  April  to  August,  1901,  was  seldom  below  eight 

'  Petitioner's  Summary  of  Evidence  in  United  States  v.  American  Can 
Company  (no.  40),  pp.  73-76. 

2  230  Fed.  Rep.  859. 

'  On  the  assumption  that  one  share  of  preferred  and  one  share  of  common 
were  equivalent  to  $100  in  cash  it  was  immaterial  to  the  promoters  whether 
the  manufacturers  took  cash  or  stock.  If  the  manufacturers  did  not  want 
stock  the  promoters  had  that  much  more  cash  to  raise,  but  they  retained  that 
much  more  stock.  Their  profits  would  not  be  affected  so  long  as  the  under- 
lying assumption  held  good. 


PROMOTERS'  PROFITS  AND  TRUSTS  293 

and  one-half  million  dollars,  and  at  times  was  considerably 
above.  It  is  not  intended  to  say  that  the  promoters  could  have 
disposed  of  their  stock  during  these  months  and  have  realized 
$8,500,000;  for  the  sale  of  some  40  per  cent  of  the  total  stock  of 
the  company  during  a  comparatively  short  period  would  doubt- 
less have  led  to  a  decline  in  its  market  value.  Yet  it  is  likely 
that  around  $8,000,000  could  have  been  realized;  and  for  this 
sum  practically  all  of  the  plants  could  have  been  duplicated.^ 
Whether  the  promoters  in  fact  realized  as  much  as  $8,000,000 
depends  on  how  much  confidence  they  had  in  the  creature  of 
their  creation.  The  greater  their  confidence,  the  less  their 
profits,- since  by  the  fall  of  1901  the  bubble  was  pricked.  Tin  can 
prices,  which  had  steadily  advanced  in  the  months  following  the 
organization  of  the  American  Can  Company,  soon  took  a  decided 
drop,  and  with  them  went  stock  market  quotations. 

The  International  Harvester  Company  (the  harvester  trust) 
was  organized  in  1902  as  a  consolidation  of  the  five  principal 
manufacturers  of  harvesting  machines.  Its  promotion  was 
notable  for  the  comparative  absence  of  promoters'  profits  or 
even  of  overcapitalization.  The  total  capitalization  of  the 
International  Harvester  Company  at  its  organization  was 
$120,000,000,  all  common  stock.  This  stock  was  allotted  as 
follows:  ^ 

For  physical  property  of  the  five  concerns  (including  bills  re- 
ceivable of  the  Mihvaukee  Company)  ^ $56,441,055 

For  bills  receivable  and  cash  of  the  other  four  manufacturing 

interests 49,851,803 

For  cash  ($10,000,000)  raised  by  the  bankers 10,000,000 

For  organization  expenses 749,999 

For  commission  to  the  bankers 2,957,143 

Total  stock  issue $1 20,000,000 

Of  the  total  capital  stock  nearly  half  ($56,441,055)  was  issued 

1  230  Fed.  Rep.  870-871. 

2  Unless  indeed  they  held  their  stock  for  a  number  of  years. 

^  Calculated  from  a  table  in  the  Report  of  the  Commissioner  of  Corpora- 
tions on  the  International  Harvester  Company,  p.  86. 

*  The  Milwaukee  Harvester  Company  was  purchased  as  a  going  concern. 


294       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

in  return  for  the  physical  properties  of  the  five  companies  (in- 
cluding bills  receivable  in  the  case  of  the  Milwaukee  company). 
The  value  of  these  properties  as  appraised  by  the  organizers  was 
approximately  $67,000,000;  as  determined  by  the  Bureau  of 
Corporations  only  about  $49,000,000.^  Neither  of  these  valua- 
tions, however,  made  any  allowance  for  good  will.  It  is  clear, 
therefore,  that  the  purchase  price  was  substantially  reasonable. 
Another  block  of  the  stock  ($49,851,803)  went  to  the  McCor- 
mick,  Deering,  Piano,  and  Warder  interests  in  exchange  for  cash 
subscriptions.  In  considerable  measure  these  cash  subscriptions 
took  the  form  of  an  assignment  to  the  International  Harvester 
Company  of  bills  receivable  guaranteed  by  the  vendor  com- 
panies; but  a  considerable  amount  of  cash  was  raised  in  addition.^ 
The  bills  receivable  being  guaranteed,  there  was  no  stock  infla- 
tion on  this  score. 

The  balance  of  the  stock  ($13,707,142)  went  to  J.  P.  Morgan 
and  Company,  the  bankers.  This  sum,  it  should  be  observed, 
does  not  include  the  $3,148,197  of  stock  given  to  the  bankers  in 
exchange  for  the  Milwaukee  Harvester  Company,  which  was 
acquired  by  the  bankers  on  behalf  of  the  combination,  and  for 
which  the  bankers  received  stock  equal  to  the  actual  value  of 
the  company  as  a  going  concern.  What  service  did  the  bankers 
perform  in  return  for  this  large  issue  of  stock?  In  the  first  place, 
they  agreed  to  subscribe  to  $10,000,000  of  the  stock  of  the 
company  at  par.'"^  In  the  second  place,  they  incurred  certain 
expenses  in  the  formation  of  the  company.  These  expenses, 
amounting  to  $749,999,  were  covered  by  a  specific  allotment  of 
stock,  which  is  included  in  the  $13,707,000.  The  balance  of  the 
stock  received  by  them  ($2,957,143)  represented  therefore  their 
commission  as  bankers.  Was  this  commission  excessive?  The 
Bureau  of  Corporations  maintained  that  it  was.    It  pointed  out 

1  Cf.  p.  236. 

^  Rejjort  on  the  International  Harvester  Company,  p.  77.  Companies 
selling  harvesting  machines  have  unusually  large  bills  receivable  because  of 
the  necessity  of  granting  long  terms  of  credit. 

'  They  originally  agreed  to  raise  $19,000,000,  but  the  amount  was  later 
reduced  to  $10,000,000. 


PROMOTERS'  PROFITS  AND  TRUSTS  295 

that  since  this  payment  to  the  bankers  did  not  correspond  to  any 
property  conveyed  or  expenses  incurred,  it  could  be  justified 
from  the  point  of  view  of  the  company  only  on  the  ground  of 
merger  value — which  did  not  materialize  in  the  early  life  of  the 
company — or  on  the  ground  of  the  value  of  an  alliance  with  the 
firm  of  J.  P.  Morgan  and  Company.^  Even  on  this  score,  that  is, 
disregarding  the  welfare  of  the  public,  it  held  the  payment  to  be 
excessive.  As  bearing  on  this  matter  it  should  be  borne  in  mind 
that  the  risk  of  the  bankers  was  comparatively  slight.  The 
bankers  acted  largely  as  the  agents  of  a  very  small  group  of 
manufacturers,  who  were  anxious  to  effect  a  combination,  and 
who  were  in  a  position  to  deliver  the  requisite  properties,  since 
the  stock  of  the  companies  was  closely  held.  Moreover,  the 
bankers  assumed  no  obligations  as  underwriters,  since  payment 
for  the  properties  was  taken  by  the  manufacturers  in  the  form  of 
stock.  The  main  contribution  of  the  bankers,  therefore,  outside 
of  the  purchase  of  the  Milwaukee  Company  and  the  organiza- 
tion of  the  Harvester  Company  (for  which  services  they  were 
specifically  remunerated)  was  the  raising  of  $10,000,000.  For 
this  cash  they  did  not,  as  was  common  in  trust  promotions, 
receive  $200  in  stock  for  each  $100  in  cash;  they  merely  re- 
ceived stock  dollar  for  dollar.  The  vital  question,  therefore,  is: 
what  was  the  value  of  the  stock  for  which  they  subscribed  at 
par?  Was  it  anticipated  that  the  organization  of  the  trust 
would  result  in  increased  profits?  In  that  case  their  commission 
was  undoubtedly  excessive.  On  the  other  hand,  was  there 
danger  that  the  stock  would  fall  below  par?  In  that  event  their 
commission  may  have  been  distinctly  moderate.  The  Report  of 
the  Bureau  of  Corporations  did  not  discuss  this  question,  and  the 
lack  of  quotations  for  the  company's  securities  during  the  early 
years  makes  it  difficult  to  return  a  satisfactory  answer.  The 
fact  is,  however,  that  the  profits  of  the  Harvester  Company  dur- 
ing its  early  years  were  rather  low,  and  its  dividend  payments 
distinctly  low.  It  would  appear,  therefore,  that  the  bankers  did 
take  considerable  risk.  It  is  conceivable  that  the  company  might 
have  been  able  to  avoid  the  issuance  of  the  $3,000,000  of  stock 
1  Report  on  the  International  Harvester  Company,  pp.  127-128. 


296        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

that  represented  the  bankers'  commissions  by  the  sale  of  $10,000,- 
000  of  stock  at  par  to  the  pubUc  (which  ordinarily  receives  no 
commission),  but  in  view  of  the  fact  that  a  great  mass  of  un- 
digested trust  securities  was  then  hanging  over  the  market  this 
is  by  no  means  certain.  In  any  event,  it  is  clear  that  the  pro- 
moters' profits  in  the  formation  of  the  harvester  trust  were  dis- 
tinctly small  as  compared  with  the  other  trusts  of  its  size  that 
were  organized  during  the  same  period. 

The  profits  of  the  promoters  of  a  number  of  other  trusts  will  be 
briefly  reviewed.  Unless  stated  to  the  contrary  it  should  be 
understood  in  each  instance  that  these  profits  are  subject  to 
some  deductions  for  promotion  expenses.  They  do  not  ordina- 
rily, therefore,  represent  net  profits. 

The  promoter  of  the  starch  trust  (1890)  secured  options  on  a 
number  of  plants  and  raised  $1,545,750.  In  return  he  received 
securities  (bonds  and  stocks)  that  had  an  average  market  value 
during  the  first  two  years  of  the  company's  life  of  $2,268,427. 
His  nominal  profits,  therefore,  were  $722,677.^ 

The  promoters  of  the  rubber  boot  and  shoe  trust  (1892)  re- 
ceived $1,300,000  of  common  stock,  which  at  the  average  quota- 
tions during  the  first  year  had  a  value  of  approximately  $560,000. 
Out  of  this  sum  the  promoters  had  to  meet  organization  expenses, 
but  unlike  many  promotions  their  risk  was  small,  since  the 
amount  of  stock  they  received  did  not  depend  on  their  skill  as 
bargainers,  but  was  a  definite  percentage  (5  per  cent)  of  the 
total  issue  of  stock.^ 

The  promoters  and  financial  backers  of  the  glucose  trust  (1897) 
raised  $4,500,000  in  cash;  and  were  given  approximately  $14,- 
500,000  in  securities,  or  over  38  per  cent  of  the  total  issue.  The 
average  market  value  of  this  stock  was  $9,000,000;  and  the 
paper  profit  was  therefore  $4,500,000.^ 

The  promoters  of  the  malt  trust  (1897)  received  $500,000  in 
preferred  stock  and  $7,750,000  in  common  stock  (or  nearly  one- 
third  of  the  total  capitalization)  to  cover  the  expenses  of  promo- 

1  Dewing,  Corporate  Promotions  and  Reorganizations,  pp.  53-55- 

2  Industrial  Comraission,  XIII,  pp.  48-49- 
'  Dewing,  op.  cit.,  p.  82. 


PROMOTERS'  PROFITS  AND  TRUSTS  297 

tion.  These  securities  were  worth  nearly  $3 ,4oo,cxx>  at  their  max- 
imum quotations,  but  they  dedined  rapidly  and  as  a  result  most 
of  the  promoters  made  but  slight  profits.^ 

The  promoters  of  the  silver- ware  trust  (1S98)  received  only 
$600,000  of  common  stock  (equal  to  3  per  cent  of  the  total  capital- 
lization),  and  out  of  this  they  had  to  meet  the  expenses  of  organ- 
ization.^ The  market  value  of  this  stock  during  the  first  year  was 
only  about  $100,000.  It  is  clear,  therefore,  that  the  profit  was 
small. 

The  promoters  of  the  asphalt  trust  (1899)  took  their  pay  in 
considerable  measure  through  the  sale  to  the  trust  at  fancy  prices 
of  a  company  which  they  organized  for  that  particular  purpose.^ 
The  properties  of  this  company  cost  them  $618,000;  and  they 
sold  them  to  the  trust  of  their  creation  for  $3,670,000  in  bonds, 
or  more  than  five  times  their  cost.  In  addition,  as  manufac- 
turers they  received  bonds  exceeding  by  nearly  $2,500,000  the 
value  of  the  properties  transferred  to  the  trust.  Their  profits  as 
promoters  were  thus  the  realizable  value  of  some  $3,000,000  of 
bonds.  The  average  price  at  which  these  bonds  first  sold  was 
around  $93,  but  the  promoters  could  not  have  sold  all  of  their 
bonds  at  this  price  without  spoiling  the  market.  There  can  be 
little  doubt,  however,  that  their  profits  were  handsome. 

The  promoter  of  the  bicycle  trust  (1899)  after  effecting  the  req- 
uisite transfer  of  securities  for  properties  retained  as  his  com- 
pensation $2,000,000  in  debenture  bonds,  $2,600,000  in  preferred 
stock,  and  $6,700,000  in  common  stock,  or  a  total  of  $11,300,000 
(equal  to  31  per  cent  of  the  company's  capitalization).  This 
does  not  include  such  profits  or  losses  as  might  have  been  made 
by  the  under\mting  syndicate  which  supplied  the  requisite 
funds  in  return  for  bonds  at  92^^  cents  on  the  dollar.  Notwith- 
standing the  fact  that  most  of  the  manufacturers  attested 
their  faith  in  the  company  by  taking  securities,  the  promoter, 
because  of  the  sudden  collapse  of  the  industry,  realized  only  a 
small  profit.^ 

The  promoters  and  bankers  that  organized  the  cotton  yarn 

1  Dewing,  op.  cit.,  pp.  276,  279.  *  Dewing,  op.  cit.,  pp.  428-450. 

^  Industrial  Commission,  I,  p.  1068.      *  Ibid.,  pp.  253-254. 


298       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

trust  (1899)  received  nearly  all  the  common  stock  ($5,000,000). 
The  consolidation  did  not  prove  successful,  and  as  a  result  the 
promoters  realized  no  profit  at  all.^  Substantially  the  same  was 
true  of  the  cotton  duck  trust,  organized  in  1901.  The  promoters 
of  this  trust  after  meeting  the  initial  organization  expenses  had 
left  $6,250,000  of  common  stock,  of  a  value  of  at  least  $1,500,000. 
Having  confidence  in  the  company  they  not  only  retained  this 
stock,  but  bought  more;  and  in  the  end  they  sustained  heavy 
losses.^ 

In  the  promotion  of  the  foregoing  trusts  promoters'  profits 
figured  more  or  less  prominently.  In  the  organization  of  a  num- 
ber of  other  trusts,  however,  promoters'  profits  were  insignificant 
or  even  entirely  absent.  This  appears  to  be  true  of  the  oil,  pow- 
der,^ sugar,  cash  register,  cordage,  leather,  aluminum,  wall  paper, 
shoe  machinery,  news  print  paper,  glass  table  ware,  and  salt 
trusts.  In  the  formation  of  some  of  these  trusts,  notably  the 
sugar  trust,  large  profits  were  made  by  the  organizers,  but  these 
profits  came  to  them  as  the  owners  of  stock  rather  than  as  pro- 
moters. In  the  formation  of  others,  notably  the  cordage  and 
leather  trusts,  there  was  some  underwriting  of  securities,  but  this 
was  a  detail  in  the  formation  of  the  trust  rather  than  an  important 
contributing  cause.  How,  it  may  be  asked,  was  it  possible  to 
organize  this  large  number  of  important  trusts  without  offering 
large  rewards  to  the  promoter,  who  is  supposed  to  perform  a  nec- 
essary function?  The  answer  is  two-fold:  (i)  some  trusts  became 
such  through  the  expansion  of  a  concern  already  in  the  field, 
rather  than  through  a  combination  at  one  time  of  most  of  the 
plants  in  the  country.  For  instance,  the  Standard  Oil  Company, 
organized  in  1870  to  take  over  the  business  of  the  partnership  to 
which  it  succeeded,  bought  first  this  property  and  then  that, 
financing  these  purchases  partly  out  of  its  enormous  earnings, 
partly  out  of  cash  subscribed  by  the  stockholders,  and  partly  by 
an  exchange  of  securities.  Obviously  no  trust  promoter  was  re- 

^  Dewing,  op.  cit.,  p.  313. 
"^  Ibid.,  p.  341. 

*  There  were  large  promoters'  profits  in  the  reorganization  of  this  trust  in 
1902;  but  none  in  the  original  organization. 


PROMOTERS'  PROFITS  AND  TRUSTS  299 

quired  to  create  a  trust  developed  in  this  fashion.  (2)  Some 
trusts,  the  news  print  paper  trust,  for  example,  were  established 
with  the  aid  of  promoters  who  took  no  pay  for  their  services. 
Their  willingness  to  perform  the  service — they  incurred  no  risk — ■ 
may  have  been  because  they  anticipated  that  the  gain  to  them 
as  manufacturers  would  be  sufScient;  or  it  may  have  been  be- 
cause they  regarded  the  task  as  an  opportunity  to  be  of  service 
to  their  trade,  and  the  honor  as  a  sufficient  reward. 

As  a  result  of  the  foregoing  study  the  conclusion  would  appear 
to  be  abundantly  justified  that  the  prospect  of  securing  promo- 
tion profits  has  contributed  markedly  toward  the  formation  of 
numerous  trusts.  It  played  a  lesser  part,  however,  than  the  hope 
of  achieving  monopoly  prices.  A  nvunber  of  trusts,  as  we  have 
seen,  were  organized  without  promoters'  profits;  w'hereas  few, 
if  any,  were  organized  without  the  anticipation  at  least  of 
monopoly  gains. 


CHAPTER  XIII 

THE  COMMON  LAW  RELATING  TO  COMBINATIONS 
AND  TRUSTS^ 

The  law  relating  to  combinations  and  trusts  is  of  two  kinds — 
first,  common  law,  and  second,  statute  law.  Statute  law,  in 
turn,  maybe  either  that  of  the  states  or  of  the  federal  government. 
Though  we  are  concerned  in  this  treatise  mainly  with  the  devel- 
opment of  statute  law  (and  particularly  of  federal  law),  a  brief 
consideration  of  the  common  law  decisions  of  the  courts  will  be 
advantageous,  especially  since  the  Supreme  Court  in  the  Standard 
Oil  case  held  that  the  term  "restraint  of  trade"  as  used  in  the 
Sherman  Act  should  be  construed  as  declaratory  of  the  common 
law  on  this  subject."  Common  law,  it  may  be  said,  imports  a  sys- 
tem of  unwritten  law,  not  evidenced  by  statute.  Its  sources  are 
found  in  the  usages,  habits,  manners,  and  customs  of  a  people;  its 
seat,  in  the  breast  of  the  judges  who  are  its  expounders.'^  Com- 
mon law  yields  to  statute  law,  where  such  exists,  yet  until  the 
late  eighties  there  were  very  few  state  statutes  dealing  with  in- 
dustrial combinations  and  trusts,  and  until  the  passage  of  the 
Sherman  Act  in  1890  there  was  no  federal  statute.  It  was  there- 
fore only  to  be  ex-pected  that  a  considerable  body  of  common 
law  doctrine  had  developed  with  respect  to  restraints  of  trade 
and  combinations  of  one  type  or  another. 

The  rule  was  early  established  in  EngHsh  law  that  contracts  or 
agreements  in  restraint  of  trade  were  void,  and  therefore  non- 

1  On  this  topic  see  the  Report  of  the  Commissioner  of  Corporations  on 
Trust  Laws  and  Unfair  Competition,  chs.  2,  7;  and  Goodnow,  Trade  Com- 
binations at  Common  Law,  PoUtical  Science  Quarterly,  12,  pp.  212-245. 
The  author  has  made  hbcral  use  of  these  works  in  preparing  this  chapter. 

2  Cf.  remarks  of  Senator  Hoar  in  Cong.  Record,  April  8,  1890,  p.  3152. 

3  Judicial  and  Statutory  Definitions  of  Words  and  Phrases,  second  series, 
p.  810, 

$00 


COMMON  LAW  AND  TRUSTS  301 

enforceable.  The  courts  refused  to  recognize  the  validity  of  any 
restraint  of  trade,  no  matter  how  limited  its  scope.  The  cases 
which  came  before  them  in  the  early  days  involved  principally 
the  right  of  an  individual,  in  disposing  of  his  business,  to  agree 
not  to  reenter  that  same  business.  The  courts  took  the  position 
that  in  the  interest  of  trade  an  individual  should  not  be  allowed 
to  contract  that  he  would  stay  out  of  the  business  in  which  he 
had  been  engaged.  Subsequently,  however,  this  rule  was  relaxed. 
In  Mitchell  v.  Reynolds  (17 11)  an  English  court  held  that  while 
general  restraints  of  trade  were  void,  a  restraint  limited  to  a  par- 
ticular place  might  under  certain  circumstances  be  enforceable.^ 
Though  American  courts,  following  Mitchell  v.  Reynolds,  have  in 
many  cases  held  that  an  agreement  involving  a  restraint  covering 
an  entire  state  is  void  as  a  general  restraint,^  still  the  cases  are 
numerous  in  which  American  courts  have  upheld  particular 
restraints  when  the  restraint  was  regarded  as  reasonable.^ 
The  modern  rule  was  well  stated  in  Hubbard  v.  Miller.  ''  If,  con- 
sidered with  reference  to  the  situation,  business  and  objects  of 
the  parties,  and  in  the  light  of  all  the  surrounding  circumstances 
with  reference  to  which  the  contract  was  made,  the  restraint 
contracted  for  appears  to  have  been  for  a  just  and  honest  pur- 
pose, for  the  protection  of  the  legitimate  interests  of  the  party 
in  whose  favor  it  is  imposed,  reasonable  as  between  them  and  not 
specially  injurious  to  the  public,  the  restraint  will  be  held  valid."  '* 
Gradually,  therefore,  the  principle  became  established  at  common 
law  that  agreements  connected  with  the  sale  of  a  business  were 
not  necessarily  void,  even  though  thereby  a  restraint  of  trade  was 
effected,  providing  the  restraint  was  reasonable  in  character. 

ii  P.  Wms.  181  (1711). 

2  See  Lawrence  v.  Kidder,  10  Barbour  (New  York)  641  (1851);  Taylor  v. 
Blanchard,  95  Massachusetts  370  (1866);  Western  Woodenware  Association 
V.  Starkey,  84  Michigan  76  (1890). 

*  See  Bowser  v.  Bliss  et  al.,  7  Blackford  (Indiana)  344  (1845);  Duffy  v. 
Shockey,  11  Indiana  70  (1858);  Beal  v.  Chase,  31  Michigan  490  (1875); 
Whitney  v.  Slayton,  40  Maine  224  (1885);  Diamond  Match  Company  v. 
Roeber,  106  New  York  473  (1887);  Robinson  v.  Suburban  Brick  Company, 
127  Fed.  Rep.  804  (1904). 

*  27  Michigan  19  (1873). 


3© 2        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 
AGREEMENTS  TO  RESTRICT  COMPETITION 

The  next  class  of  cases  to  be  described  (we  are  following  here 
the  classification  adopted  in  the  report  of  the  Commissioner  of 
Corporations  on  Trust  Laws)  is  that  relating  to  agreements 
among  competitors  to  restrict  competition  or  to  form  a  combin- 
ation, but  not  including  such  restriction  of  competition  as  re- 
sults from  the  formation  of  a  trust.  The  latter  will  be  described 
later. 

Agreements  to  restrain  competition,  as  pointed  out  in  the 
chapter  on  Pools,  may  be  of  various  sorts.  They  may  be  in- 
formal, as,  for  example,  the  gentlemen's  agreements,  or  they 
may  be  quite  formal,  with  provisions  for  penalties  in  the  event 
of  a  failure  to  observe  the  agreement.  The  agreements  may 
look  toward  the  control  of  the  supply,  the  limitation  of  the  out- 
put, the  fixing  of  prices,  the  pooling  of  profits,  or  the  division  of 
territory.  Whatever  their  form,  they  were  void  under  the 
common  law  when  they  unduly  restrained  competition,  and 
were  therefore  detrimental  to  the  public  interest.  No  rule  for 
the  determination  of  what  constituted  undue  restraint  under 
the  common  law  was  laid  down ;  the  common  law  doctrine  was 
that  each  case  should  be  settled  in  the  light  of  the  facts. 

The  state  of  the  common  law  can  best  be  indicated  by  citing 
a  few  representative  cases,  some  of  them  illustrating  invalid 
agreements,  and  some  valid  agreements. 

Invalid  Agreements  ^ 

India  Bagging  Association  v.  B.  Kock  and  Company?  Eight 
firms  had  formed  an  association  for  the  sale  of  India  bagging, 

*  See  also  Craft  v.  McConoughy,  79  Illinois  346,  (1875);  Arnot  v.  The 
Pittslon  and  Elmira  Coal  Company,  68  New  York  558  (1877);  Santa  Clara 
Valley  Mill  and  Lumber  Company  v.  Hayes,  76  California  387  (,i888); 
Andeison  v.  Jett,  89  Kentucky  375  (1889);  Samuels  v.  Oliver,  130  Illinois  73 
(1889);  Emery  z*.  Ohio  Candle  Company,  47  Ohio  State  320  (1890);  Strait  v. 
National  Harrow  Company,  18  New  Yoik  Supplement  224  (1891);  The 
Texas  Standard  Oil  Company  v.  Adoue,  83  Texas  650  (1892);  Oliver  v.  Gil- 
more,  52  Eed.  Rep.  562  (1892);  Eohn  Manufacturing  Company  v.  Hollis, 

2 14  Louisiana  Annual  Reports  i68  (1859). 


COMMON  LAW  AND  TRUSTS  303 

the  bagging  to  remain  the  property  of  the  individual  members. 
Each  firm  agreed  not  to  sell  any  bagging  for  a  period  of  three 
months,  except  ^\^th  the  consent  of  the  majority,  under  a 
penalty  of  $10  for  every  bale  sold.  The  manager  of  the  associa- 
tion brought  suit  against  one  of  the  members  for  having  sold 
740  bales  of  bagging,  in  contravention  of  the  articles  of  the 
association.  The  Court  held  that  the  agreement  entered  into 
was  palpably  and  unequivocally  a  combination  in  restraint  of 
trade,  and  to  enhance  the  price  of  an  article  of  primary  necessity 
to  cotton  planters;  and  that  it  was  contrary  to  public  order,  and 
might  not  therefore  be  enforced  in  a  court  of  justice. 

Morris  Run  Coal  Company  v.  Barclay  Coal  Company}  Five 
coal  companies  in  Pennsylvania  had  entered  into  an  arrange- 
ment in  New  York  by  which  they  agreed  to  divide  among 
themselves  in  certain  proportions  the  market  for  the  bituminous 
coal  produced  in  the  two  coal  regions  controlled  by  them;  and  to 
appoint  a  committee  to  take  charge  of  their  business.  The 
committee  was  empowered  to  adjust  the  prices  of  coal  in  the 
different  markets,  and  the  rates  of  freight,  and  to  enter  into 
agreements  with  the  anthracite  coal  companies.  Provision  was 
made  for  the  mining  of  coal  and  its  delivery  in  the  different 
markets  at  such  times  and  to  such  parties  as  the  committee 
might  direct,  and  for  the  sale  of  the  coal  through  a  general  sales 
agent  to  be  appointed  by  the  committee,  and  to  be  stationed  in 
New  York  state.  However,  the  companies  were  allowed  to  sell 
the  coal  themselves,  provided  they  did  not  exceed  the  propor- 
tion allotted  to  them,  and  provided  they  sold  at  the  prices  fixed 
by  the  committee.  In  an  action  on  a  draft,  given  in  furtherance 
of  the  agreement,  the  Court  held  that  the  contract  was  void 
under  the  common  law,  being  in  restraint  of  trade  and  against 
public  policy.    It  was  also  held  to  be  void  on  the  ground  that 

54  Minnesota  223  (1893);  Nester  v.  Continental  Brewing  Company,  161 
Pennsylvania  State  473  (1894);  Charleston  Natural  Gas  Company  v.  Kana- 
wha Natural  Gas,  Light  and  Fuel  Company,  58  West  Virginia  22  (1905); 
Pocahontas  Coke  Company  v.  Powhatan  Coal  and  Coke  Company,  60  West 
Virginia  508  (1906). 

168  Pennsylvania  State  173  (1871). 


304       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

it  violated  a  New  York  statute  prohibiting  conspiracies  to 
commit  an  act  injurious  to  trade  or  commerce. 

The  Central  Ohio  Salt  Company  v.  Guthrie.'^  Practically  all 
the  salt  manufacturers  in  the  Hocking  and  Muskingum  valleys, 
Ohio,  had  formed  a  voluntary  association  for  the  express  purpose 
of  regulating  the  price,  and  sustaining  the  quality  of  salt.  By  the 
articles  of  association,  all  salt  manufactured  or  owned  by  the 
members  became  the  property  of  the  Central  Ohio  Salt  Company 
as  soon  as  it  was  packed  into  barrels.  The  members  of  the 
association  were  then  prohibited  from  selling  any  salt  except  by 
retail  at  the  factory,  and  except  at  prices  fixed  by  the  company. 
The  proceeds  of  sales  were  turned  over  to  the  members  in  pro- 
portion to  the  amount  of  salt  received  from  each.  For  some 
tune  after  the  organization  of  the  association  the  defendant 
complied  with  the  agreement,  but  subsequently  he  refused  to 
deliver  to  the  company  the  output  of  his  furnace.  Whereupon 
the  Central  Salt  Company  brought  suit  to  enforce  the  agree- 
ment. 

The  judge  pointed  out  that  while  it  was  well  settled  that  all 
contracts  in  partial  -  restraint  of  trade  were  not  void  as  against 
pubHc  policy,  it  was  as  fully  established  that  contracts  in 
general  ^  restraint  were  against  public  policy,  and  therefore  ab- 
solutely void.  "Public  policy,"  he  said, " unquestionably, favors 
competition  in  trade,  to  the  end  that  its  commodities  may  be 
afforded  to  the  consumer  as  cheaply  as  possible,  and  is  opposed 
to  monopolies,  which  tend  to  advance  market  prices,  to  the 
injury  of  the  general  pubKc."  The  Court  held  that  the  clear 
tendency  of  the  agreement  before  it  was  to  establish  a  monopoly, 
and  to  destroy  competition  in  trade,  and  for  that  reason,  on 
grounds  of  public  policy,  the  Court  would  not  aid  in  its  enforce- 
ment. To  say  that  competition  in  the  salt  trade  was  not  de- 
stroyed, or  that  the  price  of  the  commodity  was  not  unreason- 
ably advanced  was  no  answer;  it  was  enough  that  the  inevitable 
tendency  of  such  contracts  was  injurious  to  the  public. 

Raymond  v.  Leaidtt}    The  plaintiff  had  lent  the  defendant 

•  35  Ohio  State  666  (1880).  -  Italics  supplied  by  the  author. 

'46  Michigan  447  (1881). 


COMMON  LAW  AND  TRUSTS  305 

$10,000  for  the  purpose  of  controlling  the  wheat  market  at 
Detroit,  the  intent  being  to  force  up  prices.  The  defendant  was 
to  give  the  plaintiff  one-third  of  the  profits,  and  at  all  events  to 
repay  the  principal.  The  Court  held  that  the  object  of  the 
arrangement  between  the  parties  was  to  force  a  fictitious  and 
unnatural  rise  in  the  wheat  market  for  the  express  purpose 
of  getting  the  advantage  of  dealers  and  purchasers.  The  Court 
declined  to  enforce  such  a  contract.  It  held  that  if  people  saw 
fit  to  invest  their  money  in  such  ventures,  they  must  get  it  back 
by  some  other  than  legal  measures. 

De  Witt  Wire-Cloth  Company  v.  New  Jersey  Wire-Cloth 
Company}  Five  concerns  engaged  in  the  manufacture  and 
sale  of  wire  cloth  entered  into  an  agreement  whereby,  for  the 
avowed  purpose  of  regulating  the  price  of  wire  cloth,  they  formed 
themselves  into  an  association,  agreed  that  they  would  not  sell 
below  stipulated  prices,  and  subjected  themselves  to  a  heavy 
penalty  for  the  violation  of  the  agreement.  The  Court  held  that 
the  inevitable  effect  of  this  agreement  was  to  restrict  competi- 
tion in  trade,  and  to  enhance  arbitrarily  the  price  of  a  commod- 
ity of  commerce;  and  it  was  a  settled  principle  in  the  jurispru- 
dence of  this  country  that  sucii  a  contract  was  repugnant  to 
public  policy,  and  thus  unlawful.  The  Court  held  that  the 
people  had  a  right  to  the  necessaries  and  conveniences  of  life  at 
a  price  determined  by  the  relation  of  supply  and  demand,  and 
the  law  forbade  any  agreement  or  combination  whereby  that 
price  was  removed  beyond  the  salutary  influence  of  legitimate 
competition. 

Chapin  v.  Brown  Brothers r  The  grocery  men  of  Storm  Lake, 
Iowa,  finding  the  business  of  purchasing  and  retailing  butter 
burdensome,  and  believing  that  the  business  could  be  handled 
more  satisfactorily  by  one  concern  making  this  its  exclusive 
affair,  agreed  with  the  firm  of  D.  and  E.  Chapin  that  for  a  period 
of  two  years  they  would  buy  no  more  butter  or  take  none  in  trade, 
except  for  the  use  of  their  own  families.  The  Chapin  firm  in 
accordance  with  this  agreement  established  a  store  in  Storm 

'  14  New  York  Supplement  277  (1891),  '^  83  Iowa  156  (1891). 


3o6        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Lake.  Notwithstanding  the  agreement  the  defendants  sub- 
sequently opened  a  butter  store.  The  Chapin  concern  brought 
suit  to  enforce  the  agreement. 

The  Court  refused  to  enforce  the  agreement  on  the  ground 
that  it  lacked  consideration,  and  that  it  was  against  pubUc 
policy.  The  Court  held  that  it  plainly  tended  to  monopolize 
the  butter  trade  of  Storm  Lake,  and  to  destroy  competition 
in  the  business.  By  this  decision  an  agreement  against  public 
policy  was  declared  void,  even  though  it  applied  to  purchase 
rather  than  sale,  and  even  though  it  resulted  in  no  disadvantage 
to  the  consuming  public  generally,  the  parties  injured  being  the 
producers  of  butter. 

More  V.  Bennett}  The  law  stenographers  of  the  city  of  Chi- 
cago had  formed  an  association,  the  object  of  which  was  to  estab- 
lish and  maintain  uniform  rates  for  stenographic  work  done  by 
the  members  of  the  association.  A  schedule  of  rates  had  been 
drawn  up,  but  it  had  not  been  observed  by  the  defendant,  so  the 
plaintiff  alleged.  The  Court,  however,  refused  to  award  dam- 
ages. It  held  that  one  of  the  leading  objects  of  the  association,  if 
not  its  leading  object^  was  to  control  the  prices  to  be  charged  by 
its  members  by  restraining  all  competition  between  them;  and 
the  agreement  was  thus  so  obnoxious  to  public  policy  as  to  render 
it  improper  for  the  courts  to  lend  their  aid  to  its  enforcement. 
This  decision  is  significant  in  that  the  Court  applied  the  same 
rules  to  agreements  regulating  the  price  of  labor  as  were  applied 
by  the  courts  generally  to  agreements  regulating  the  price  of 
commodities. 

The  People  of  the  Slate  of  New  York  v.  The  Milk  Exchange.^ 
The  Milk  Exchange  had  some  ninety  stockholders,  most  of 
whom  were  either  milk  dealers  in  the  city  of  New  York  or 
creamery  and  milk  commission  men  in  the  vicinity.  At  the 
first  meeting  after  its  incorporation  it  adopted  a  by-law  which 
provided  that  the  board  of  directors  should  have  power  to  fix 
the  price  at  which  milk  was  to  be  purchased  by  the  stockholders. 
The  directors  accordingly  fixed  the  price  of  milk  from  time  to 

1  140  Illiuois  69  (1892).  2 14s  New  York  267  (1895). 


COMMON  LAW  AND  TRUSTS  307 

time,  and  the  prices  thus  established  largely  controlled  the 
market  in  New  York  and  vicinity.  The  Attorney  General  of  the 
state  brought  suit  to  have  the  charter  of  the  company  forfeited. 
The  Court  granted  the  relief  requested.  It  held  that  the  evi- 
dence justified  a  finding  that  the  Milk  Exchange  was  a  combina- 
tion inimical  to  trade,  and  thus  unlawful.  That  the  purpose  of 
the  combination  may  have  been  to  reduce  the  price  of  milk  made 
no  difference.  The  price  was  fixed  for  the  benefit  of  the  dealers, 
not  the  consumers;  and  the  logical  effect  of  the  fixing  of  prices 
by  the  combination  was  to  paralyze  the  production  and  limit  the 
supply,  and  thus  to  leave  dealers  in  a  position  to  enhance  the 
price  to  be  paid  by  consumers. 

Slaughter  v.  T hacker  Coal  and  Coke  Company. ^  The  Thacker 
Coal  Company  had  been  organized  in  1895  for  the  sole  purpose  of 
acting  as  the  sales  agent  of  the  Thacker  Coal  and  Coke  Com- 
pany, and  two  other  coal  mining  concerns.  The  Thacker  Coal 
Company  entered  into  a  contract  with  the  Thacker  Coal  and 
Coke  Company,  whereby  it  agreed  to  sell  for  the  latter  at  least 
20,000  tons  of  coal  a  year  for  five  years,  at  a  commission  of  10 
cents  per  ton.  The  Coal  and  Coke  Company  agreed  to  deliver 
to  the  selling  corporation  as  much  coal  as  the  latter  could  sell, 
but  not  to  exceed  84,000  tons  a  year.  The  mining  concern  agreed 
to  pay  10  cents  per  ton  as  liquidated  damages,  should  it  fail  to 
deliver  coal  according  to  the  agreement.  Selling  prices  were 
fixed  in  the  agreement,  and  were  not  to  be  changed  without  the 
consent  of  the  three  producing  companies.  In  1896  the  Thacker 
Coal  and  Coke  Company  refused  to  deliver  any  more  coal  under 
the  contract.  The  receiver  for  the  Thacker  Coal  Company 
thereupon  brought  suit  against  the  Coal  and  Coke  Company  for 
damages.  The  Court  pointed  out  that  the  modern  rule  at 
common  law  was  that  contracts  in  restraint  of  trade  were 
enforceable,  if  they  did  not  unreasonably  restrain  trade.  But 
the  contract  before  it,  though  relating  to  only  an  insignificant 
part  of  the  coal  produced  in  the  state,  was  held  to  be  illegal  as 
tending  to  injure  the  pubHc;  and  therefore  no  recovery  could  be 
had  on  it. 

^  55  West  Virginia  642  (1904). 


3o8        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Valid  Agreements  ^ 

Skrainka  v.  Scharringhausen.^  Twenty-four  owners  and 
operators  of  stone  quarries  in  a  section  of  St.  Louis,  desiring  to 
effect  a  sale  of  their  stone  at  "uniform  prices  and  living  rates," 
had  entered  into  an  agreement,  which  was  to  last  for  six  months. 
The  agreement  made  provision  for  the  appointment  of  an  ex- 
clusive sales  agent,  who  was  to  apportion  the  output  among  the 
quarries  and  to  sell  the  stone  at  specified  prices.  The  defendant, 
who  had  violated  the  agreement,  and  thus  incurred  a  penalty, 
contended  that  the  agreement  was  in  restraint  of  trade,  and  not 
enforceable  at  law.  The  Court  pointed  out  that  the  old  doctrine 
of  the  common  law,  declaring  that  contracts  in  restraint  of  trade 
were  void,  was  no  longer  to  be  insisted  upon  as  rigorously  as  it 
had  been  in  the  earlier  cases.  Every  agreement  in  restraint  of 
trade  was  no  longer  illegal.  When  a  contract  injured  the  parties 
making  it,  by  diminishing  their  means  for  supporting  their 
families;  when  it  tended  to  deprive  the  public  of  the  services  of 
useful  men;  when  it  discouraged  industry,  diminished  produc- 
tion, prevented  competition,  enhanced  prices,  and  when,  being 
made  by  large  companies  or  corporations,  it  excluded  rivalry  and 
engrossed  the  markets — that  is,  tended  to  "  make  a  corner" — it 
was  against  the  policy  of  the  law.  But  restraints  upon  trade 
imposed  by  agreement,  under  limitations  as  to  locality,  time,  and 
persons,  were  not  necessarily  restraints  of  trade  in  the  general 
sense,  and  thus  objectionable.  Applying  this  principle  to  the 
case  before  it,  the  Court  said,  "The  agreement  is  among  the 
quarrymen  of  one  district  of  one  city,  and  it  does  not  appear 
that  it  embraces  all  of  them.  There  is  no  evidence  that  it  works 
any  pubHc  mischief,  and  the  contract  is  not  of  such  a  nature  that 
it  is  apparent  from  its  terms  that  it  tends  to  deprive  men  of 
employment,  unduly  raise  prices,  cause  a  monopoly,  or  put  an 
end  to  competition.    It  is  limited  both  as  to  time  and  place;  and 

1  See  also  Long  v.  Towl,  42  Missouri  545  (1868);  Gloucester  Isinglass  and 
Glue  Company  v.  Russia  Cement  Company,  154  Massachusetts  92  (1891); 
and  Matthews  v.  Associated  Press,  136  New  York  ^t,^  (1893). 

2  8  Missouri  Appeals  Reports  522  (i88o). 


COMMON  LAW  AND  TRUSTS  309 

we  know  of  no  case  in  recent  times  in  which  a  contract  such  as 
the  one  before  us  has  been  declared  illegal." 

Dolph  V.  Troy  Laundry  Machinery  Company}  The  plaintiff 
and  the  defendant  were  the  two  leading  manufacturers  of  wash- 
ing machines  in  the  United  States.  In  order  to  avoid  the  conse- 
quences of  competition  with  each  other,  and  to  secure  better 
prices  and  larger  returns,  they  had  entered  into  a  five-year  agree- 
ment to  divide  profits.  The  Dolph  concern  was  to  have  the 
option  of  manufacturing  all  machines  sold  by  both  parties,  and 
the  Troy  concern  agreed  to  take  a  certain  number  of  machines 
annually.  The  Troy  concern  having  terminated  the  contract 
prior  to  its  expiration,  the  Dolph  concern  brought  suit  to  recover 
damages.  The  Court  held  the  agreement  valid.  As  its  decision 
seems  to  have  taken  a  different  turn  from  the  great  majority  of 
cases,  we  quote  at  some  length. 

"Assuming  that,  in  entering  into  the  contract,  the  parties 
contemplated  that  the  defendant  should  cease  manufacturing 
machines,  and  buy  all  its  machines  from  the  plaintiff,  and  that 
the  only  purpose  in  view  was  to  promote  the  interests  of  the 
parties,  and  enable  them  to  obtain  from  customers  higher  prices 
for  the  machines,  it  is  not  obvious  how  such  a  contract  con- 
travenes any  principle  of  pubUc  policy.  Washing-machines, 
although  articles  of  convenience,  are  not  articles  of  necessity. 
The  scheme  of  the  parties  did  not  contemplate  suppressing  the 
manufacture  or  sale  of  machines  by  others.  Those  who  might  be 
unwilling  to  pay  the  prices  asked  by  the  parties  could  find  plenty 
of  mechanics  to  make  such  machines,  and  the  law  of  demand  and 
supply  would  effectually  counteract  any  serious  mischief  likely 
to  arise  from  the  attempt  of  the  parties  to  get  exorbitant  prices 
for  their  machines.  It  is  quite  legitimate  for  any  trader  to 
obtain  the  highest  price  he  can  for  any  commodity  in  which  he 
deals.  It  is  equally  legitimate  for  two  rival  manufacturers  or 
traders  to  agree  upon  a  scale  of  selHng  prices  for  their  goods,  and 
a  division  of  their  profits.  It  is  not  obnoxious  to  good  morals,  or 
to  the  rights  of  the  public,  that  two  rival  traders  agree  to  consoli- 
date their  concerns,  and  that  one  shall  discontinue  business,  and 
1  28  Fed.  Rep.  553  (1886). 


3IO       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

become  a  partner  with  the  other,  for  a  specified  term.  It  may 
happen,  as  the  result  of  such  an  arrangement,  that  the  pubHc 
have  to  pay  more  for  the  commodities  in  which  the  parties  deal; 
but  the  public  are  not  obliged  to  buy  of  them.  Certainly,  the 
public  have  no  right  to  complain,  so  long  as  the  transaction  falls 
short  of  a  conspiracy  between  the  parties  to  control  prices  by 
creating  a  monopoly." 

Central  Shade-Roller  Company  v.  Cushman}  Three  manu- 
facturers of  shade-rollers,  each  possessing  different  letters  patent, 
had,  for  the  purpose  of  avoiding  competition,  organized  the 
Central  Shade-Roller  Company,  and  severally  entered  into  an 
agreement  with  it  that  all  sales  of  shade-rollers  should  be  in  the 
name  of  the  Central  Company,  and  should  be  at  once  reported  to 
it.  It  was  further  provided  in  the  agreement  that  the  prices  for 
rollers  of  the  same  grade  should  be  the  same,  the  price  to  be 
according  to  a  schedule  contained  in  the  contract,  subject  to 
changes  made  by  the  company  on  the  recommendation  of 
three-fourths  of  the  stockholders;  and  that  when  either  party 
should  establish  an  agency  in  any  city  for  the  sale  of  a  particular 
roller,  no  other  party  should  take  orders  for  the  same  roller  in 
the  same  place.  The  Central  Shade-Roller  Company  alleged 
that  the  defendant  had  broken  the  contract,  and  prayed  for 
an  injunction  to  restrain  the  defendant  from  selling  rollers  in 
violation  thereof. 

The  Court  upheld  the  agreement.  It  held  that  the  contract 
put  no  restraint  upon  the  production  or  sale  of  shade-rollers; 
on  the  contrary  its  apparent  purpose  was,  by  making  prices  more 
uniform  and  regular,  to  stimulate  production.  Moreover,  the 
agreement  did  not  refer  to  an  article  of  prime  necessity,  nor  to  a 
staple  of  commerce,  nor  to  merchandise  to  be  bought  and  sold  in 
the  market,  but  to  a  particular  curtain  fixture  of  the  parties'  own 
manufacture.  Finally,  the  agreement  did  not  aim  to  affect 
competition  from  outside, — the  parties  had  a  monopoly  by  their 
patents, — but  only  to  restrict  competition  in  price  among  the 
members.    Even  if  it  were  true  that  the  agreement  tended  to 

1  143  Massachusetts  353  (1887). 


COMMON  LAW  AND  TRUSTS  311 

raise  the  price  of  the  commodity,  it  was,  nevertheless,  one  which 
the  parties  had  a  right  to  make.  But  the  Court  refused  to 
assume  that  the  purpose  and  effect  of  the  combination  was  to 
raise  unduly  the  price  of  the  commodity.  It  held  that  its  natural 
effect  would  be  the  maintenance  of  a  fair  and  uniform  price,  and 
the  prevention  of  the  injury  to  producers  and  consumers  result- 
ing from  fluctuating  prices,  in  turn  the  result  of  undue  competi- 
tion. The  question  would  be  different,  said  the  Court,  if  it 
appeared  that  the  combination  was  used  to  the  public  detriment. 
The  contract  being  apparently  beneficial  to  the  parties  and  not 
necessarily  injurious  to  the  public,  the  Court  declined  to  hold  it 
invalid  as  a  restraint  of  trade,  or  against  public  policy. 

It  is  doubtful  whether  the  principle  laid  down  in  this  case  is 
sound.  In  United  States  v.  Addyston  Pipe  and  Steel  Company, 
a  federal  court,  discussing  the  shade-roller  case,  said  that  it  was 
there  held  that  contracts  in  restraint  of  trade  are  not  invalid  if 
they  affect  trade  in  articles  which,  though  useful  and  convenient, 
are  not  articles  of  prime  or  public  necessity.  But  "we  think  the 
cases  hereafter  cited  show  that  the  common  law  rule  against 
restraint  of  trade  extends  to  all  articles  of  merchandise."  ^ 

"trustee  device"  cases 

We  now  come  to  the  common  law  cases  dealing  with  trusts. 
These  trusts,  as  we  have  seen,  at  one  time  took  the  form  of  a 
"trust"  agreement  or  a  trustee  device,  but  later  took  the  form  of 
a  corporate  combination.  The  cases  declaring  the  "trust"  agree- 
ment illegal  will  be  first  considered.^ 

Mallory  v.  Hanaur  Oil-Works.^  This  was  one  of  the  first  cases 
involving  a  "  trust "  agreement.  In  July,  1 884,  four  corporations 
manufacturing  cotton  seed  oil  at  Memphis,  Tennessee,  entered 
into  a  contract.  They  agreed  to  turn  over  to  a  committee,  com- 
posed of  representatives  of  each  corporation,  the  properties  and 

1  85  Fed.  Rep.  286  (1898). 

2  See  also  Pittsburg  Carbon  Company  (Ltd.)  v.  McMillin,  119  New  York 
46  (1890);  and  Bishop  v.  American  Preservers'  Company,  157  Illinois  284 

(1895)- 

3  86  Tennessee  598  (1888). 


512         THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

machinery  of  each  mill.  These  properties  were  to  be  managed 
for  the  common  benefit  by  the  committee  (it  went  under  the  name 
of  the  "Independent  Cotton-Seed  Association");  and  the  profits 
and  losses  were  to  be  divided  among  the  corporations  according 
to  definite  proportions.  This  arrangement  was  to  last  one  year, 
but  it  might  be  renewed  for  two  additional  years;  and  in  fact  was 
renewed  at  the  end  of  the  first  year.  Prior  to  the  expiration  of 
the  agreement  the  Hanaur  Oil-Works  passed  a  resolution  declar- 
ing the  contract  void,  as  being  ultra  vires,  and  directed  its  pres- 
ident to  resume  possession  of  the  mill.  The  association  refused 
to  turn  over  the  mill,  whereupon  suit  was  brought  by  the  Hanaur 
Oil- Works  to  recover  possession. 

The  Court  held  that  the  agreement  entered  into  was  a  con- 
tract of  partnership  between  corporations;  that  the  Hanaur  Oil- 
Works  under  its  charter  had  no  power  to  enter  such  a  partner- 
ship; that  the  contract  was  therefore  void;  and  that  consequently 
the  company  might  resume  possession  of  its  property.  The 
Court  did  not  deem  it  necessary  to  consider  the  question  of  the 
legality  of  such  a  combination  of  corporations  as  one  tending 
to  create  a  monopoly,  though  it  pointed  out  that  the  question 
thus  raised  was  a  grave  one. 

State  V.  Nebraska  Distilling  Company.^  The  Nebraska  Dis- 
tilling Company  had  entered  the  Distillers  and  Cattle  Feeders' 
Trust  in  1887,  but  its  plant,  though  it  had  formerly  been  oper- 
ated at  a  profit,  was  closed  by  order  of  the  trustees.  Subse- 
quently at  a  meeting  of  the  stockholders  of  the  Nebraska  Dis- 
tilling Company  the  directors  were  authorized  to  sell  the 
company's  property,  to  cancel  all  the  stock  outstanding,  and 
to  dissolve  the  corporation.  The  state  thereupon  brought  suit 
to  obtain  a  forfeiture  of  the  corporate  franchise  of  the  company. 
The  Court  held  that  the  object  of  the  Nebraska  Distilling  Com- 
pany in  entering  the  illegal  combination  was  to  destroy  com- 
petition, and  create  a  monopoly;  that  any  contract  entered  into 
with  such  an  object  was,  under  the  laws  of  the  state,  null  and 
void;  that  the  conveyance  from  the  distilling  company  to  the 
trust  was  in  contravention  of  the  authority  conferred  by  law 
^  29  Nebraska  700  (1890). 


COMMON  LAW  AND  TRUSTS  313 

upon  that  company,  in  excess  of  the  powers  granted  by  its 
charter,  and  against  pubhc  poHcy  and  void;  and  that  no  title  had 
passed  by  such  conveyance.  The  Court  further  held  that  the  cor- 
porate franchise,  having  been  abused,  would  be  annulled;  and 
that  the  property  of  the  Nebraska  Distilling  Company,  being 
within  the  jurisdiction  of  the  Court,  would  be  disposed  of  in 
such  manner  as  justice  required. 

The  People  of  the  State  of  New  York  v.  The  North  River  Sugar 
Refining  Company}  The  organization  of  the  Sugar  Refineries 
Company  in  1SS7  has  already  been  described.-  In  1888  the 
Attorney  General  of  New  York  brought  suit  against  the  North 
River  Sugar  Refining  Company,  alleging  that  the  entry  of  the 
company  into  the  trust  justified  the  vacating  of  its  charter. 

The  Court  held  it  that  could  not  be  denied  that  the  North 
River  Sugar  Refining  Company  had  became  an  integral  part  of 
a  combination  which  possessed  over  it  absolute  control.  The 
defendants,  however,  alleged  that  this  outcome  was  the  result 
of  action  by  the  stockholders  and  not  by  the  corporation,  and 
that  therefore  the  penalty  of  dissolution  should  not  be  visited 
upon  the  corporation.  But  the  Court  held  that  there  might  be 
actual  corporate  conduct  without  formal  corporate  action.  It 
pointed  out  that  the  stockholders  at  a  meeting  had  unanimously 
adopted  a  resolution  favoring  the  establishment  of  the  "trust", 
and  had  entered  into  an  agreement  to  transfer  their  shares  of 
stock  to  the  trustees.  The  stockholders  in  acting  collectively,  as 
an  aggregate  body,  without  the  least  exception,  had  reached  re- 
sults clearly  corporate  in  character,  and  they  could  not  escape 
the  consequence  of  their  acts  by  pleading  the  innocence  of  a 
convenient  fiction,  that  is,  the  corporation.  It  being  established 
that  the  North  River  Sugar  Refining  Company  had  partici- 
pated in  the  creation  of  the  trust,  it  was  next  necessary  to  deter- 
mine whether  this  was  illegal.  The  Court  held  that  it  was  clear 
that  the  defendant  had  accepted  from  the  state  the  gift  of  cor- 
porate life  only  to  disregard  the  conditions  upon  which  it  had 
been  given;  that  it  had  received  its  powers  and  privileges  merely 
to    put    them    in    pawn;    that  it    had  given  away  to  an  ir- 

1 121  New  York  582  (1890).  ^  Cf.  p.  22. 


314        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

responsible  board  its  entire  independence  and  self-control. 
Its  stockholders  had  parted  with  the  control  which  the 
charter  gave  them  and  the  state  required  them  to  ex- 
ercise. And  graver  still  was  the  fact  that  the  corporation 
had  helped  to  create  an  anomalous  trust,  which  was  in  substance 
and  effect  a  partnership  of  twenty  separate  corporations;  and  it 
was  a  violation  of  the  law  for  corporations  to  enter  into  a  partner- 
ship. The  Court  therefore  declared  that  the  charter  of  the  com- 
pany should  be  forfeited,  and  its  corporate  existence  annulled. 
The  Court  indulged  in  a  dictum  as  to  the  injurious  effects  of 
monopolies  upon  the  public,  but  did  not  decide  the  case  on  that 
ground,  holding  that  it  was  needless  in  this  instance  "  to  advance 
into  the  wider  discussion  over  monopolies  and  competition  and 
restraint  of  trade  and  the  problems  of  political  economy." 

State  v.  Standard  Oil  Company}  We  have  already  described 
at  some  length  the  Standard  Oil  "trust"  agreement  of  1882.^ 
The  Supreme  Court  of  Ohio  in  a  decision  rendered  in  1892  de- 
clared the  agreement  illegal.  In  a  line  of  reasoning  similar  to 
that  of  the  New  York  court  in  the  North  River  Sugar  Refining 
Company  case,  it  held  that  the  action  of  the  stockholders  of  the 
Standard  Oil  Company  in  turning  over  their  shares  to  the  trus- 
tees provided  for  in  the  agreement  had  affected  the  property  and 
business  of  the  Standard  Oil  Company  in  the  same  manner  as  if 
it  had  been  a  formal  resolution  of  the  board  of  directors,  and  that 
their  acts  should  be  regarded  as  the  acts  of  the  corporation.  And 
the  nature  of  the  agreement  was  such  as  to  preclude  the  Standard 
Oil  Company  of  Ohio  from  becoming  a  party  to  it.  The  law  re- 
quired that  a  corporation  should  be  controlled  and  managed  by 
its  directors  in  the  interests  of  its  own  stockholders,  and  conform- 
able to  the  purpose  for  which  it  was  created  by  the  laws  of  the 
state.  But  by  the  agreement  entered  into  the  defendant  was 
controlled  and  managed  by  the  Standard  Oil  Trust,  an  associa- 
tion with  its  principal  place  of  business  in  New  York,  and  organ- 
ized for  a  purpose  contrary  to  the  policy  of  the  laws  of  the  state 
of  Ohio.  "Its  object  was  to  establish  a  virtual  monopoly  of  the 
business  of  producing  petroleum,  and  of  manufacturing,  refining 

» 49  Ohio  State  137  (1892).  2  q^  p.  ^g. 


COMMON  LAW  AND  TRUSTS  315 

and  dealing  in  it  and  all  its  products,  throughout  the  entire 
country,  and  by  which  it  might  not  merely  control  the  produc- 
tion, but  the  price  at  its  pleasure.  All  such  associations  are  con- 
trary to  the  policy  of  our  state  and  void."  The  Court  therefore 
held  that  the  Standard  Oil  Company  should  be  forbidden  to 
carry  out  the  agreement  which  it  had  entered  into  with  the 
"trust." 

CORPORATE  COMBINATION  CASES 

The  last  class  of  cases  deals  with  the  establishment  of  corpo- 
rate combinations.^    The  first  of  these  was: 

Richardson  v.  Buhlr  The  Diamond  Match  Company  was 
organized  in  Connecticut  in  1880  for  the  purpose  of  acquiring  all 
the  factories  in  the  United  States  manufacturing  friction 
matches,  with  the  intent  of  monopolizing  the  business  and 
controlling  prices.  The  companies  which  went  into  the  trust 
exchanged  their  real  estate,  machinery,  patents,  good  will,  and 
agreements  not  to  reenter  the  match  business  for  common  stock 
in  the  Diamond  Match  Company;  and  agreed  to  buy  preferred 
stock  equal  to  one-half  the  amount  of  common  stock  received, 
the  preferred  stock  to  be  paid  for  in  matches  or  match  materials 
on  hand,  or  in  cash.  The  Richardson  Match  Company  not 
being  in  sufficient  funds  to  buy  the  preferred  stock,  borrowed 
money  from  Buhl,  and  to  secure  the  repayment  of  the  loan 
endorsed  the  greater  part  of  the  preferred  stock  over  to  Buhl, 
with  an  agreement  between  the  parties  as  to  the  division  of  the 
dividends  received  on  the  stc^ck  held  as  collateral.  Suit  was 
brought  by  Richardson  in  connection  with  this  agreement. 

The  parties  to  the  suit  did  not  dispute  the  validity  of  the 
contract  entered  into,  but  the  Court,  on  its  own  motion,  raised 
the  question.  The  Court  held  that  the  contract  had  been 
entered  into  to  aid  the  Diamond  Match  Company  in  carrying 
out  the  object  for  which  it  had  been  organized, — the  monopoli- 
zation of  the  manufacture  of  friction  matches  in  the  United 

1  See  also  People  v.  Chicago  Gas  Trust  Company,  130  Illinois  268  (1889); 
and  Harding  v.  The  American  Glucose  Company,  182  Illinois  551  (1899). 

2  77  Michigan  632  (1889). 


3i6       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

States.  But  monopoly  in  trade  or  in  any  kind  of  business, 
according  to  the  Court,  was  odious  to  our  form  of  government; 
its  tendency  was  destructive  of  free  institutions,  and  repugnant 
to  the  instincts  of  a  free  people.  The  Diamond  Match  Company 
being  unla\\'ful,  and  the  contract  in  question  having  been  made 
to  further  its  objects  and  purposes,  the  contract  was  void  as 
against  public  policy. 

Distilling  and  Cattle  Feeding  Company  v.  People.^  Reference 
has  been  made  to  the  organization  of  the  Distillers  and  Cattle 
Feeders'  Trust  in  1887.^  In  1890,  because  of  court  decisions 
holding  similar  trusts  illegal,  the  corporate  form  of  organization 
was  adopted.  In  1893  the  Attorney  General  of  Illinois  brought 
suit  against  the  Distilling  and  Cattle  Feeding  Company  (the 
corporation  which  succeeded  the  "trust"),  alleging  that  the 
company  had  misused  its  powers  and  franchises. 

The  Court  held  that  no  one  who  intelligently  considered  the 
scheme  of  the  Distillers  and  Cattle  Feeders'  Trust  could  for  a 
moment  doubt  that  it  was  designed  to  be,  and  was  in  fact,  a 
combination  in  restraint  of  trade;  and  that  it  was  organized  for 
the  purpose  of  getting  control  of  the  manufacture  and  sale  of 
all  distillery  products,  so  as  to  stifle  competition,  and  to  be  able 
to  dictate  output  and  prices,  and  thus  to  create  or  tend  to 
create  a  monopoly.  The  " trust"  was  clearly  against  the  policy 
of  the  law,  and  it  was  therefore  illegal  and  void.  And  the 
corporation  had  merely  succeeded  to  the  trust.  Its  operations 
were  to  be  carried  on  in  the  same  way,  for  the  same  purposes, 
and  by  the  same  agencies  as  before.  The  former  trustees 
became  the  directors  of  the  new  corporation,  and  the  trust 
certificate  holders  became  its  stockholders.  The  trust  being 
repugnant  to  pubHc  policy  and  illegal,  it  was  impossible  to 
see,  said  the  Court,  why  the  same  was  not  true  of  the  corpora- 
tion which  succeeded  to  it  and  took  its  place.  The  control  over 
the  distillery  business  of  the  country,  over  production  and 
prices,  and  the  virtual  monopoly  formerly  held  by  the  trust,  were 
in  no  degree  changed  or  relaxed.  The  Court  concluded,  "There 
is  no  magic  in  a  corporate  organization  which  can  purge  the 

1  156  lUinois  448  (1895).  ^Cf.  p.  21. 


COMMON  LAW  AND  TRUSTS  317 

trust  scheme  of  its  illegality,  and  it  remains  as  essentially 
opposed  to  the  principles  of  sound  public  policy  as  when  the 
trust  was  in  existence.  It  was  illegal  before,  and  is  illegal  still, 
and  for  the  same  reasons."  ^  The  judgment  of  the  court  below 
ousting  the  company  from  its  franchises  was  therefore  affirmed. 

The  cases  outlined  in  this  chapter  illustrate  fairly  the  deci- 
sions of  the  courts  of  the  country,  which  almost  without  excep- 
tion have  held  illegal  all  agreements  in  unreasonable  restraint  of 
trade,  and  all  monopolies  or  attempted  monopolies,  irrespective 
of  the  form  in  which  they  were  clothed.  The  decisions  of  the 
courts  declaring  illegal  the  trust  agreements  in  the  cotton  seed 
oil,  whisky,  sugar,  oil,  and  preserving  industries,  and  the  corpo- 
rate combinations  in  the  match  and  whisky  industries  apparently 
left  no  loophole  under  the  common  law  for  the  establishment  of 
industrial  monopoHes. 

We  may  now  proceed  to  describe  the  federal  legislation  deal- 
ing with  combinations  and  trusts,  and  the  decisions  of  the  courts 
interpreting  this  legislation. 

^  156  Illinois  491. 


CHAPTER  XIV 
TRUST  LEGISLATION  TO  1914  ' 

During  the  years  1882  to  1887  a  number  of  trusts  had  been 
created.  This  movement  toward  industrial  monopoly  was 
viewed  with  great  concern  by  the  people  of  the  United  States, 
and  a  vigorous  demand  was  made  for  the  enactment  of  legisla- 
tion that  would  definitely  make  these  trusts  illegal.  As  Justice 
Harlan  said  in  1911 :  "  All  who  recall  the  condition  of  the  country 
in  1890  will  remember  that  there  was  everywhere,  among  the 
people  generally,  a  deep  feeling  of  unrest.  The  Nation  had  been 
rid  of  human  slavery — fortunately,  as  all  now  feel — but  the  con- 
viction was  universal  that  the  country  was  in  real  danger  from 
another  kind  of  slavery  sought  to  be  fastened  on  the  American 
people,  namely,  the  slavery  that  would  result  from  aggregations 
of  capital  in  the  hands  of  a  few  individuals  and  corporations 
controlling,  for  their  own  profit  and  advantage  exclusively,  the 
entire  business  of  the  country,  including  the  production  and  sale 
of  the  necessaries  of  life. "  ^  In  1888  both  of  the  leading  political 
parties  referred  in  their  platforms  to  the  dangers  inherent  in 
trusts,  and  demanded  action.  Thus,  the  platform  of  the  Re- 
publican party  read: 

"We  declare  our  opposition  to  all  combinations  of  capital, 
organized  in  trusts  or  otherwise,  to  control  arbitrarily  the 
condition  of  trade  among  our  citizens;  and  we  recommend  to 
Congress  and  the  state  legislatures,  in  their  respective  jurisdic- 
tions, such  legislation  as  will  prevent  the  execution  of  all  schemes 
to  oppress  the  people  by  undue  charges  on  their  supplies,  or  by 
unjust  rates  for  the  transportation  of  their  products  to  market."  ^ 

'  For  a  more  detailed  account  of  the  lej^slation  of  this  period,  see  Knauth, 
The  Policy  of  the  United  States  towards  Industrial  Monopoly. 

2221  U.  S.  83. 

^  McKee,  The  National  Conventions  and  Platforms  of  all  Political  Parties, 
p.  241. 

318 


TRUST  LEGISLATION  TO  1914  319 

The  Democratic  party  platform  held  that  "the  interests  of  the 
people  are  betrayed  when,  by  unnecessary  taxation,  trusts  and 
combinations  are  permitted  to  exist,  which,  while  unduly  en- 
riching the  few  that  combine,  rob  the  body  of  our  citizens  by 
depriving  them  of  the  benefits  of  natural  competition."  ^  In  the 
same  year  investigations  of  trusts  were  provided  for  by  the 
House  of  Representatives  and  by  the  state  of  New  York;  and 
numerous  bills  dealing  with  combinations  and  trusts  were  intro- 
duced in  the  United  States  Senate.  The  opposition  to  trusts 
crystallized  in  1S90  in  the  passage  on  July  2  of  the  Sherman 
Anti-trust  Act, — as  it  is  generally  called. 

The  course  of  the  act  through  Congress  has  been  described 
elsewhere,"  and  only  a  brief  sketch  need  be  given  here.  The  bill 
was  introduced  in  the  Senate  by  Senator  Sherman  of  Ohio  on 
December  4,  18S9.  It  was  debated  on  February  27,  March  21, 
March  24-27,  and  April  8, 1890.  During  the  course  of  the  debate 
Senator  George  stated  his  belief  that  "  the  sentiment  that  some- 
thing ought  to  be  done  pervades  this  body  almost  universally; "  ^ 
and  it  is  significant  as  supporting  this  view  that  only  one  speech 
in  opposition  to  anti-trust  legislation  was  delivered  in  the  Sen- 
ate.^ Having  been  revised  so  completely  that  it  bore  little  re- 
semblance to  the  original  measure,  the  bill  passed  the  Senate 
on  April  8,  by  a  vote  of  fifty- two  to  one,  twenty-nine  being 
absent.^  On  May  i  the  bill  was  taken  up  in  the  House,  and 
after  a  short  debate  was  passed  with  one  amendment,  the  votes 
not  being  recorded.^  The  House  amendment  did  not  prove  ac- 
ceptable to  the  Senate,  and  accordingly  a  conference  became 
necessary.  Eventually  on  June  20  by  a  vote  of  242  to  o,  85 
not  voting,  the  House  agreed  to  withdraw  its  amendment.^    The 

1  McKee,  The  National  Conventions  and  Platforms  of  all  Political  Parties, 

P-  235- 

^  Walker,  History  of  the  Sherman  Law,  chs.  1-2,  and  Knauth,  The 
Policy  of  the  United  States  towards  Industrial  Monopoly,  ch.  i, 

^  Cong.  Record,  March  25,  1890,  p.  2598. 

■*  Ibid.,  March  24,  1890,  pp.  2565-66. 

^  Ibid.,  April  8,  1890,  p.  3153. 

^  Ibid.,  May  i,  1890,  p.  4104.  ■, 

^  Ibid.,  June  20,  1890,  p.  6312, 


320       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

bill  was  signed  by  President  Harrison  on  July  2 ;  and  in  its  final 
form  was  identical  with  the  measure  as  it  had  passed  the  Senate 
on  April  8. 

The  pro\dsions  of  the  act  may  be  briefly  summarized  (the  text 
is  given  in  a  footnote).^ 

1  An  act  to  protect  trade  and  commerce  against  unlawful  restraints  and 
monopolies. 

Be  it  enacted  by  the  Senate  and  House  of  Representatives  of  the  United  States  of 
America  in  Congress  assembled, 

Sec.  I.  Every  contract,  combination  in  the  form  of  trust  or  otherwise,  or 
conspiracy,  in  restraint  of  trade  or  commerce  among  the  several  States,  or 
with  foreign  nations,  is  hereby  declared  to  be  illegal.  Every  person  who  shall 
make  any  such  contract  or  engage  in  any  such  combination  or  conspiracy, 
shall  be  deemed  guilty  of  a  misdemeanor,  and,  on  conviction  thereof,  shall  be 
punished  by  fine  not  exceeding  five  thousand  dollars,  or  by  imprisonment  not 
exceeding  one  year,  or  by  both  said  punishments,  in  the  discretion  of  the 
court. 

Sec.  2.  Every  person  who  shall  monopolize,  or  attempt  to  monopolize,  or 
combine  or  conspire  with  any  other  person  or  persons,  to  monopolize  any 
part  of  the  trade  or  commerce  among  the  several  States,  or  with  foreign 
nations,  shall  be  deemed  guilty  of  a  misdemeanor,  and,  on  conviction  thereof, 
shall  be  punished  by  fine  not  exceeding  five  thousand  dollars,  or  by  imprison- 
ment not  exceeding  one  year,  or  by  both  said  punishments,  in  the  discretion 
of  the  court. 

Sec.  3.  Every  contract,  combination  in  the  form  of  trust  or  otherwise,  or 
conspiracy,  in  restraint  of  trade  or  commerce  in  any  Territory  of  the  United 
States  or  of  the  District  of  Columbia,  or  in  restraint  of  trade  or  commerce 
between  any  such  Territory  and  another,  or  between  any  such  Territory  or 
Territories  and  any  State  or  States  or  the  District  of  Columbia,  or  with 
foreign  nations,  or  between  the  District  of  Columbia  and  any  State  or  States 
or  foreign  nations,  is  hereby  declared  illegal.  Every  person  who  shall  make 
any  such  contract  or  engage  in  any  such  combination  or  conspiracy,  shall  be 
deemed  guilty  of  a  misdemeanor,  and,  on  conviction  thereof,  shall  be  pun- 
ished by  fine  not  exceeding  five  thousand  dollars,  or  by  imprisonment  not 
exceeding  one  year,  or  by  both  said  punishments,  in  the  discretion  of  the 
court. 

Sec.  4.  The  several  circuit  courts  of  the  United  States  are  hereby  invested 
with  jurisdiction  to  prevent  and  restrain  violations  of  this  act;  and  it  shall  be 
the  duty  of  the  several  district  attorneys  of  the  United  States,  in  their 
respective  districts,  under  the  direction  of  the  Attorney-General,  to  institute 
proceedings  in  equity  to  prevent  and  restrain  such  violations.  Such  pro- 
ceedings may  be  by  way  of  petition  setting  forth  the  case  and  praying  that 
such  violation  shall  be  enjoined  or  otherwise  prohibited.    When  the  parties 


TRUST  LEGISLATION  TO  1914  321 

Section  one  declares  illegal  every  contract,  combination  in  the 
form  of  trust  or  otherwise,  or  conspiracy,  in  restraint  of  interstate 
or  foreign  commerce;  and  provides  a  penalty.  Section  two  is 
directed  against  monopolizing,  or  attempting  to  monopolize, 
any  part  of  the  trade  or  commerce  among  the  several  states,  or 
with  foreign  nations;  and  provides  a  penalty.  Section  three 
declares  illegal  every  contract,  combination  in-  the  form  of  trust 
or  otherwise,  or  conspiracy,  in  restraint  of  trade  or  commerce 
in  any  Territory  of  the  United  States  or  in  the  District  of  Colum- 
bia, and  likewise  any  such  contract,  etc.,  in  restraint  of  trade  or 
commerce  between  any  two  territories,  or  between  any  territory 

complained  of  shall  have  been  duly  notified  of  such  petition  the  court  shall 
proceed,  as  soon  as  may  be,  to  the  hearing  and  determination  of  the  case;  and 
pending  such  petition  and  before  final  decree,  the  court  may  at  any  time 
make  such  temporary  restraining  order  or  prohibition  as  shall  be  deemed 
just  in  the  premises. 

Sec.  5.  Whenever  it  shall  appear  to  the  court  before  which  any  proceeding 
under  section  four  of  this  act  may  be  pending,  that  the  ends  of  justice  require 
that  other  parties  should  be  brought  before  the  court,  the  court  may  cause 
them  to  be  summoned,  whether  they  reside  in  the  district  in  which  the  court 
is  held  or  not;  and  subpoenas  to  that  end  may  be  served  in  any  district  by 
the  marshal  thereof. 

Sec.  6.  Any  property  owned  under  any  contract  or  by  any  combination, 
or  pursuant  to  any  conspiracy  (and  being  the  subject  thereof)  mentioned  in 
section  one  of  this  act,  and  being  in  the  course  of  transportation  from  one 
State  to  another,  or  to  a  foreign  country,  shall  be  forfeited  to  the  United 
States,  and  may  be  seized  and  condemned  by  like  proceedings  as  those  pro- 
vided by  law  for  the  forfeiture,  seizure,  and  condemnation  of  property 
imported  into  the  United  States  contrary  to  law. 

Sec.  7.  Any  person  who  shall  be  injured  in  his  business  or  property  by  any 
other  person  or  corporation  by  reason  of  anything  forbidden  or  declared  to 
be  unlawful  by  this  act,  may  sue  therefor  in  any  circuit  court  of  the  United 
States  in  the  district  in  which  the  defendant  resides  or  is  found,  without 
respect  to  the  amount  in  controversy,  and  shall  recover  three  fold  the  dam- 
ages by  him  sustained,  and  the  costs  of  suit,  including  a  reasonable  attorney's 
fee. 

Sec.  8.  That  the  word  "person,"  or  "persons,"  wherever  used  in  this  act 
shall  be  deemed  to  include  corporations  and  associations  existing  under  or 
authorized  by  the  laws  of  either  of  the  United  States,  the  laws  of  any  of  the 
Territories,  the  laws  of  any  State,  or  the  laws  of  any  foreign  country. 

Approved,  July  2,  1890. 

26  Statutes  at  Large,  pp.  209-21C?, 


32  2        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

and  the  District  of  Columbia,  or  between  either  of  these  juris- 
dictions and  any  state  or  any  foreign  nation.  The  same  penalty 
as  in  sections  one  and  two  is  provided.  Section  four  invests 
the  circuit  courts  of  the  United  States  with  jurisdiction  to  en- 
force the  law,  and  provides  that  the  federal  government  may 
institute  proceedings  in  equity  to  prevent  and  restrain  any  vio- 
lations thereof.  Section  five  authorizes  the  courts  to  summon 
before  them  parties  other  than  the  defendants,  if  such  seems  to 
be  necessary  to  effect  justice.  Section  six  authorizes  the  seizure 
and  condemnation  of  property  owned  under  any  contract  or  by 
any  combination,  etc.,  prohibited  in  section  one,  and  being 
transported  in  interstate  or  foreign  commerce.  Section  seven 
confers  upon  persons  injured  by  the  violation  of  the  law  the  right 
to  sue  the  offending  party  for  treble  damages  and  the  costs  of 
the  suit.  Section  eight  provides  that  the  word  person  as  used 
in  the  act  shall  be  deemed  to  include  corporations  and  associa- 
tions, no  matter  where  incorporated. 

For  nearly  a  quarter  of  a  century  after  1890  the  Sherman  Act 
remained  on  the  statute  books  unamended.  Not  until  1914  did 
Congress  again  give  the  subject  of  trust  legislation  the  consider- 
ation that  its  importance  demanded,  and  proceed  to  remedy  the 
defects  disclosed  by  experience  and  judicial  interpretation.  Such 
legislation  dealing  with  trusts  as  was  enacted  in  the  meantime 
was  mainly  directed  toward  supplementing  the  Sherman  Act  in 
minor  particulars. 

The  first  addition  to  the  Sherman  Act  came  in  1894  as  a  part 
of  the  Wilson  tariff  bill,  which  became  law  on  August  27, 
without  receiving  President  Cleveland's  signature.  Section  73  of 
this  law  provided  in  substance  that  every  combination,  conspir- 
acy, trust,  agreement,  or  contract  was  illegal,  when  made  by  or 
between  two  or  more  persons  or  corporations,  either  of  whom 
was  engaged  in  importing  any  article  into  the  United  States,  and 
when  intended  to  operate  in  restraint  of  lawful  trade,  or  free  com- 
petition in  lawful  trade,  or  to  increase  the  market  price  in  the 
United  States  of  any  article  imported  into  the  United  States,  or 
of  any  manufacture  into  which  such  imported  article  entered.^ 

1  28  Statutes  at  Large,  p.  570.    Sections  74,  75,  76,  and  77  of  the  Wilson 


TRUST  LEGISLATION  TO  1914  323 

Provision  was  made  for  a  penalty  (fine,  or  fine  and  imprisonment) 
and  for  the  seizure  and  condemnation  of  the  property  imported 
into  the  United  States  contrary  to  law. 

Between  1894  and  1903  no  further  anti-trust  legislation  was 
enacted  by  the  national  government.  The  decision  of  the  Su- 
preme Court  in  the  Knight  case  ^  in  January,  1895,  greatly  limit- 
ing, as  it  then  seemed,  the  effectiveness  of  the  Sherman  Act, 
might  well  have  led  to  further  legislation.  But  this  decision  not 
only  limited  the  effectiveness  of  the  Sherman  Act,  but  seemed  to 
call  into  question  the  very  power  of  the  federal  government  to 
deal  effectively  with  trusts.  Confronted  with  this  decision 
President  Cleveland,  who  viewed  the  organization  of  trusts  with 
grave  concern,  turned  to  the  states  as  best  able  to  provide  the 
necessary  relief."  He  might,  to  be  sure,  have  recommended  a 
constitutional  amendment  increasing  the  powers  of  the  federal 
government,  yet  this  suggestion  would  not  have  been  acceptable 
to  his  party.  Indeed  it  is  not  improbable  that  many  members  of 
his  party  actually  welcomed  the  decision  in  the  Knight  case,  since 
it  seemed  to  bolster  up  the  doctrine  of  state  rights, — a  doctrine 
dearer  then  than  now  to  good  Democrats.  No  matter  how  deeply 
concerned  they  might  be  over  the  establishment  of  trusts — the 
problem  was  by  no  means  as  serious  at  that  time  as  it  became 
shortly  thereafter — one  could  hardly  expect  the  members  of  the 
Democratic  party  in  the  middle  nineties  to  support  a  constitu- 
tional amendment  that  would  give  to  the  federal  government  the 
power  which,  by  the  decision  in  the  Knight  case,  it  apparently 
lacked. 

In  1897  the  Republican  party  again  returned  to  power.  The 
platform  of  this  party  in  1896  had  made  no  reference  to  trusts 
except  a  statement  to  the  effect  that  the  true  American  policy  of 
protection  is  "equally  opposed  to  foreign  control  and  domestic 
monopoly; "  ^  and  one  could  thus  perhaps  hardly  have  looked  for 

tariff  act  were  substantially  identical  with  sections  4,  5,  6,  and  7,  respec- 
tively, of  the  Sherman  Act  of  1890. 

^See  p.  388. 

^  See  Richardson,  Messages  and  Papers  of  the  Presidents,  pp.  744-745. 

'  McKee,  op.  cit.,  p.  300, 


324       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

any  trust  legislation  from  this  party  at  that  time.  As  a  matter 
of  fact  the  attention  of  the  Republican  party  during  President 
McKinley's  first  term  was  mainly  directed  toward  tariff  legisla- 
tion, the  war  with  Spain,  and  the  currency  situation. 

Not  until  the  closing  years  of  the  nineteenth  century,  how- 
ever, did  the  trust  problem  reach  a  really  acute  stage.  The  or- 
ganization of  numerous  trusts  to  cover  fields  formerly  quite  com- 
petitive created  an  entirely  new  situation.  In  the  face  of  this 
situation  President  McKinley  in  December,  1899,  in  his  annual 
message  to  Congress,  took  up  the  subject  of  trusts.  He  said  in 
part:  "Combinations  of  capital  organized  into  trusts  to  control 
the  conditions  of  trade  among  our  citizens,  to  stifle  competition, 
limit  production,  and  determine  the  prices  of  products  used  and 
consumed  by  the  people,  are  justly  provoking  public  discussion, 
and  should  early  claim  the  attention  of  Congress.  ...  It 
is  universally  conceded  that  combinations  which  engross  or  con- 
trol the  market  of  any  particular  kind  of  merchandise  or  commod- 
ity necessary  to  the  general  community,  by  suppressing  natural 
and  ordinary  competition,  whereby  prices  are  unduly  enhanced 
to  the  general  consumer,  are  obnoxious  not  only  to  the  common 
law  but  also  to  the  pubHc  welfare.  .  .  .  Whatever  power 
the  Congress  possesses  over  this  most  important  subject  should 
be  promptly  ascertained  and  asserted."  ^ 

Early  in  1900,  also,  the  Industrial  Commission,  which  had 
been  appointed  in  1898  to  investigate  trusts  and  monopolies, 
inter  alia,  made  its  preliminary  report,  recommending  more  de- 
tailed supervision  over  industrial  corporations  engaged  in  inter- 
state operations.  The  testimony  before  this  commission  and  the 
publication  of  its  report  focussed  popular  attention  upon  this 
subject.  The  state  of  the  public  mind  at  this  time  is  indicated  in 
the  fact  that  the  Republican  party,  which  had  hardly  referred  to 
trusty  in  its  platform  in  1896,  inserted  in  its  platform  in  1900 
this  clause: 

"We  recognize  the  necessity  and  propriety  of  the  honest  coop- 
eration of  capital  to  meet  new  business  conditions,  and  especially 
to  extend  our  rapidly  increasing  foreign  trade;  but  we  condemn 
J  Cong,  Record,  December  5,  1899,  p.  25, 


TRUST  LEGISLATION  TO  1914  325 

all  conspiracies  and  combinations  intended  to  restrict  business, 
to  create  monopolies,  to  limit  production,  or  to  control  prices, 
and  favor  such  legislation  as  will  effectively  restrain  and  prevent 
all  such  abuses,  protect  and  promote  competition,  and  secure  the 
rights  of  producers,  laborers,  and  all  who  are  engaged  in  industry 
and  commerce."  ^ 

Much  more  vigorous  denunciation  of  trusts  was  made  in  the 
platform  of  the  Democratic  party,  as  is  shown  by  the  following 
extracts: 

"Private  monopolies  are  indefensible  and  intolerable.  They 
destroy  competition,  control  the  price  of  all  material  and  of  the 
finished  product,  thus  robbing  both  producer  and  consumer. 
They  lessen  the  employment  of  labor  and  arbitrarily  fix  the  terms 
and  conditions  thereof,  and  deprive  individual  energy  and  small 
capital  of  their  opportunity  for  betterment.  They  are  the  most 
eflScient  means  yet  devised  for  appropriating  the  fruits  of  indus- 
try to  the  benefit  of  the  few  at  the  expense  of  the  many,  and  un- 
less their  insatiate  greed  is  checked,  all  wealth  will  be  aggregated 
in  a  few  hands  and  the  republic  destroyed. 

"  We  pledge  the  Democratic  party  to  an  unceasing  warfare  in 
nation,  state  and  city  against  private  monopoly  in  every  form. 

"  Tariff  laws  should  be  amended  by  putting  the  products  of 
trusts  upon  the  free  list,  to  prevent  monopoly  under  the  plea  of 
protection. 

"  We  condemn  the  Dingley  Tariff  Law  as  a  trust-breeding 
measure,  skillfully  devised  to  give  the  few  favors  which  they  do 
not  deserve  and  to  place  upon  the  many  burdens  which  they 
should  not  bear."  ^ 

To  satisfy  the  popular  demand  for  trust  legislation,  a  number 
of  bills  were  introduced  in  Congress  in  1900.  One  of  the  prin- 
cipal legislative  proposals  was  a  constitutional  amendment  to 
give  Congress  adequate  power  to  deal  with  trusts  and  to  maintain 
an  open  field  for  competition  in  industry.  This  measure  received 
a  comfortable  majority  in  the  House,  but  failed  to  secure  the  two- 
thirds  requisite  for  a  constitutional  amendment,  and  thus  came 

1  McKee,  op.  cit.,  pp.  342-343. 

2  Ibid.,  pp.  334-3^6, 


326        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

to  naught.^  Doubtless  a  partial  explanation  of  the  failure  of 
this  amendment  is  the  fact  that  the  decision  of  the  Supreme  Court 
in  the  Addyston  Pipe  case,  rendered  in  December,  1899,  had 
made  it  clear  that  the  Sherman  Act  was  more  effective,  and  the 
power  of  the  national  government  more,  extensive,  than  had 
theretofore  been  supposed. - 

The  constitutional  amendment  having  failed  of  passage,  the 
House  immediately  took  up  consideration  of  a  bill  to  amend  the 
Sherman  Act.  This  bill  was  quite  drastic,  proposing  among 
other  things  to  deny  the  privilege  of  interstate  transportation  to 
manufacturing  concerns  organized  for  the  purpose  of  monopo- 
lizing the  manufacture  or  sale  of  articles  of  commerce,  or  of  in- 
creasing or  decreasing  their  price  with  the  intent  of  preventing 
competition  in  their  manufacture  or  sale.^  In  the  opinion  of  the 
committee  that  reported  out  the  bill  the  measure  fully  exhausted 
the  power  of  Congress  to  control  combinations  and  trusts  by 
penal  legislation.  The  bill  was  debated  in  the  House  during  only 
one  day,  and  after  being  amended  so  as  to  exclude  labor  organ- 
izations from  its  prohibitions  was  passed  by  the  House  by  a  vote 
of  274-1.^  The  sole  dissenting  vote  was  cast  by  Mr.  James  R. 
Mann,  later  the  Republican  leader  of  the  House  of  Represent- 
atives. The  Senate  received  the  bill  on  June  4,  referred  it  to  the 
appropriate  committee,  and  three  days  later  adjourned  sine  die. 

In  1903  two  laws  dealing  with  trusts  were  passed.''  The  first 
was  an  act  to  expedite  the  hearing  and  determination  of  cases 
arising  under  the  anti-trust  act  and  the  act  to  regulate  com- 
merce.^ 

^  Cong.  Record,  June  i,  1900,  p.  6426;  and  House  Report  no.  1501,  56th 
Cong.,  I  St  Sess. 

2  See  p.  395. 

^  House  Report  no.  1506,  56th  Cong.,  ist  Sess. 

*  Cong.  Record,  June  2,  1900,  p.  6502. 

*  A  proviso  in  the  Legislative,  Executive,  and  Judicial  Appropriation  Act 
of  February  25,  1903,  granted  immunity  to  persons  testifying  in  suits  brought 
under  the  anti-trust  or  interstate  commerce  acts.  32  Statutes  at  Large, 
part  I,  p.  904.  Because  of  the  "immunity  bath"  decision  (see  p.  485)  this 
immunity  was  limited  in  1906  to  natural  persons  only.  34  Statutes  at 
Large,  part  I,  p.  798. 

'  32  Statutes  at  Large,  part  I,  p.  823. 


TRUST  LEGISLATION  TO  1914  327 

The  purpose  of  this  bill  was  to  reduce  the  delay  of  the  courts 
in  settling  important  cases  arising  under  the  anti-trust  and  inter- 
state commerce  acts,  and  to  that  end  it  provided  in  substance 
that  the  circuit  courts  of  the  United  States  must  give  precedence 
to  suits  in  equity  arising  under  these  acts,  when  the  United 
States  was  a  complainant,  and  when  the  Attorney  General 
certified  that  the  suits  were  of  general  public  importance;  and 
it  further  provided  that  appeals  must  be  taken  direct  to  the 
Supreme  Court,  and  within  sixty  days  from  the  entry  of  the 
decree  of  the  lower  court. 

The  second  act  established  an  agency  to  secure  greater  pub- 
licity of  the  affairs  of  industrial  corporations.  The  organiza- 
tion of  numerous  trusts  concerning  which  the  public  knew  little 
had  naturally  created  a  popular  demand  for  publicity.  Presi- 
dent Roosevelt  in  his  first  annual  message  to  Congress  had  said 
"the  first  essential  in  determining  how  to  deal  with  the  great 
industrial  combinations  is  knowledge  of  the  facts — publicity."  ^ 
In  his  second  annual  message  he  had  repeated  this  recommenda- 
tion, saying  that  "publicity  can  do  no  harm  to  the  honest  cor- 
poration; and  we  need  not  be  overtender  about  sparing  the  dis- 
honest corporation."  ^  Congress  yielded  to  his  wishes  in  this 
matter  (his  wishes  were  those  of  the  country),  and  in  February, 
1903,  established,  in  the  newly  created  Department  of  Commerce 
and  Labor,  a  Bureau  of  Corporations,  which,  under  the  direction 
of  the  Secretary  of  Commerce  and  Labor,  was  to  investigate  the 
affairs  of  industrial  corporations  engaged  in  interstate  or  for- 
eign commerce,  the  President  of  the  United  State  to  determine 
what  part  of  the  information  thus  obtained  should  be  made 
public.^  At  the  head  of  the  Bureau  there  was  to  be  a  Com- 
missioner of  Corporations,  appointed  by  the  President,  with  a 
salary  of  $5,000.  He  was  empowered  to  compel  the  attendance 
and  testimony  of  witnesses,  and  the  production  of  documentary 
evidence. 

By  the  passage  in  1903  of  the  act  creating  the  Bureau  of  Cor- 

^  Cong.  Record,  December  3,  1901,  p.  83. 

^Ibid.,  December  2,  1902,  p.  7. 

^  32  Statutes  at  Large,  part  I,  pp.  827-828, 


328        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

porations,  the  Expedition  Act,  and  the  Elkins  Act  dealing  with 
railroad  rebates,  the  Republican  party  during  President  Roose- 
velt's first  term  made  distinct  progress  in  anti-trust  legislation. 
But  during  President  Roosevelt's  second  term,  though  he  regu- 
larly referred  to  trusts  in  his  messages  to  Congress,  nothing  what- 
ever was  accomplished.^  Mention  should  be  made,  however,  of 
one  of  his  main  recommendations.  In  his  message  of  1907  Presi- 
dent Roosevelt  had  suggested  that  agreements  among,  or  com- 
binations of,  corporations  be  submitted  to  a  government  body 
for  its  approval.  In  a  special  message  presented  to  Congress  on 
March  25,  1908,  he  took  up  this  matter  in  more  detail.  He 
pointed  out  that  in  the  modern  industrial  world  combinations 
among  business  men  and  laboring  men  were  absolutely  necessary, 
and  they  were  coming  more  and  more  to  be  necessary  among 
farmers.  The  Sherman  Anti-trust  Law,  though  only  partially 
effective  against  vicious  combinations,  had  been  construed  so 
as  to  prohibit  every  combination  for  the  transaction  of  modern 
business.  He  therefore  recommended  that  some  governmental 
authority,  presumably  the  Commissioner  of  Corporations,  be 
authorized  to  pass  on  the  validity  of  contracts  filed  with  it,  and 
if  within  a  definite  time  (say  sixty  days)  the  Commissioner  had 
not  prohibited  such  contract,  it  would  not  be  deemed  to  be 
illegal  unless  in  unreasonable  restraint  of  trade. ^ 

A  bill  embodying  this  suggestion  was  introduced  in  the  Sen- 
ate on  April  i,  1908,  only  a  week  after  the  reading  of  the  Presi- 
dent's message.  On  January  26,  1909,  the  Committee  on  the 
Judiciary  (to  which  the  bill  had  been  referred)  brought  out  the 
measure,  but  with  an  adverse  report.  The  committee  in  an 
unanimous  report  pointed  out  that  the  effect  of  the  bill  would  be 
to  confer  a  dispensing  power,  a  power  of  granting  immunity,  on 
a  mere  bureau  head  (the  Commissioner  of  Corporations  for  in- 
dustrial corporations)  or  on  an  administrative  body  (the  Inter- 
state Commerce  Commission  for  railroads),  and  in  both  in- 
stances without  notice  or  hearing, — a  course  of  procedure  that 

1  Except  for  an  amendment  of  the  immunity  provisions.  See  footnote 
to  p.  326. 

2  Cong.  Record,  March  25,  1908,  p.  3854. 


TRUST  LEGISLATION  TO  1914  329 

would  not  be  tolerated  in  any  court  in  the  country.^  The  Senate 
thereupon  accepted  the  recommendation  of  the  committee  that 
the  bill  be  postponed  indefinitely. - 

This  bill  was  the  only  one  proposing  to  amend  the  Sherman 
Act  that  was  reported  out  of  committee  during  the  period  inter- 
vening between  the  enactment  of  the  1903  legislation  and  the 
close  of  the  Roosevelt  administration  in  March,  1909.  The  only 
tangible  evidence  given  by  Congress  of  interest  in  trusts  was 
in  the  passage  of  several  resolutions  of  investigation.  Among 
these  were  a  joint  resolution,  approved  by  the  President  on 
March  7,  1906,  instructing  the  Interstate  Commerce  Commis- 
sion to  make  examinations  into  the  subject  of  railroad  discrimi- 
nations and  monopolies  in  coal  and  oil;  ^  a  resolution  of  the  Sen- 
ate directing  the  Attorney  General  to  furnish  it  with  a  statement 
of  all  suits  instituted  by  the  Department  of  Justice  under  the 
Sherman  Anti-trust  Act  and  the  Interstate  Commerce  Law, 
and  the  disposition  made  of  the  suits;  ^  a  resolution  of  the  Senate 
directing  the  Secretary  of  Commerce  and  Labor  to  investigate 
the  causes  of  the  high  price  of  lumber,  and  to  determine  whether 
there  was  a  combination  or  trust  in  the  supplying  thereof;  ^  and 
the  passage  by  the  House  of  a  resolution  to  appoint  a  committee 
to  investigate  the  paper  industry,  and  to  inquire  whether  there 
was  a  paper  combination.^ 

WilHam  Howard  Taft  became  President  on  March  4,  1909. 
President  Taft  made  frequent  reference  to  the  trust  question, 
and  recommended  far-reaching  changes  in  our  legislation.  On 
January  7,  1910,  in  a  special  message  to  Congress  on  the  anti- 

^  Senate  Report  no.  848, 60th  Cong.,  and  Sess.,  p.  9. 

^  Cong.  Record,  January  26,  1909,  p.  1395.  Subsequently  the  Supreme 
Court  of  the  United  States  in  the  Standard  Oil  and  Tobacco  cases  in  191 1  by 
the  enunciation  of  its  "rule  of  reason"  made  the  passage  of  such  a  bill 
unnecessary;  since  these  decisions,  as  will  be  pointed  out  later,  limited 
the  application  of  the  Sherman  Act  to  unreasonable  contracts  and  combina- 
tions. 

^  Cong.  Record,  March  7,  1906,  p.  3440. 

*  Ibid.,  June  25,  1906,  p.  9089. 

6  Ibid.,  January  18,  1907,  pp.  i33o-i333- 

"Ibid.,  April  21,  1908,  p.  5033. 


330       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

trust  and  interstate  commerce  laws,  he  expressed  himself  as 
hostile  to  trusts,  and  to  all  schemes  to  stifle  competition  and 
raise  prices.^  His  main  legislative  recommendation  was  the 
enactment  of  a  voluntary  federal  incorporation  law,  and  pro- 
vision by  means  of  this  law  for  the  filing  of  reports  with  the  De- 
partment of  Commerce  and  Labor,  and  for  the  prevention  of 
stock-watering  and  holding  companies  (except  for  special  rea- 
sons approved  by  the  proper  federal  authority).  In  subsequent 
messages  he  renewed  his  recommendation  for  a  federal  incorpora- 
tion law,  and  recommended  further  that  a  Federal  Corporation 
Commission,  of  the  dignity  and  power  of  the  Interstate  Com- 
merce Commission,  be  established  to  supervise  the  companies 
taking  out  federal  charters;  that  the  courts  be  empowered  to 
invoke  the  aid  of  this  body  or  the  Commissioner  of  Corpora- 
tions in  drafting  dissolution  decrees;  and  that  price  cutting  to 
eliminate  competitors,  exclusive  contracts,  and  other  kindred 
devices  for  stifling  competition  and  effecting  monopoly  be 
specifically  declared  illegal  and  criminal. 

Despite  President  Taf  t's  great  interest  in  anti-trust  legislation, 
and  the  obvious  need  of  action,  only  minor  changes  in  the  law 
deaHng  with  trusts  were  made  during  his  administration.  On 
June  25, 19 10,  the  Act  to  Expedite  Hearings  (1903)  was  amended. 
The  act  as  amended  provided  that  if  a  member  of  the  circuit 
court  was  necessarily  absent  or  disqualified,  the  justice  of  the 
Supreme  Court  assigned  to  that  circuit  (or  the  other  circuit 
court  judges)  might  designate  some  district  judge  within  that 
circuit  to  sit  in  the  court  at  the  hearing  of  the  suit.-  It  provided 
further  that  any  case  in  which  the  judges  were  unable  to  agree 
on  a  decision  or  order,  instead  of  being  certified  to  the  Supreme 
Court  for  review  as  if  on  appeal,  should  be  retried  before  the 
court,  reconstituted  through  the  appointment  by  the  Chief 
Justice  of  the  Supreme  Court  of  another  circuit  judge  to  sit 
with  the  court  in  the  determination  of  that  particular  case. 

In  1913  a  bill  was  passed  to  provide  for  publicity  in  taking 
evidence  under  the  Sherman  Act.     Senator  Nelson,  who  re- 

*  Cong.  Record,  January  7,  1910,  pp.  381  seq. 

*  36  Statutes  at  Large,  part  I,  p.  854. 


TRUST  LEGISLATION  TO  1914  331 

ported  the  bill,  explained  that  a  suit  had  been  instituted  by  the 
Department  of  Justice  against  the  Shoe  Machinery  Trust,  and 
that  the  federal  judge  had  ordered  the  testimony  before  the 
master  to  be  taken  behind  closed  doors,  instead  of  before  the 
general  pubUc,  as  was  the  usual  procedure.^  The  purpose  of  this 
bill,  which  was  recommended  by  the  Department  of  Justice,  was 
to  insure  that  testimony  in  cases  under  the  anti-trust  law  be 
taken  publicly  as  in  open  court.  It  was  passed  by  the  Senate  on 
January  13;  by  the  House  on  March  2;  and  signed  by  President 
Taft  on  March  3.^ 

The  remaining  legislation  passed  during  the  Taft  administra- 
tion was  not  particularly  important.  The  practice  of  espionage 
on  the  business  of  competitors  was  dealt  with  by  a  clause  in  the 
Mann-Elkins  Act  of  1910,  which  provided  that  no  carrier  or  its 
agent  should  disclose  information  concerning  either  the  route, 
destination,  or  consignee  of  any  shipment,  when  such  informa- 
tion might  be  used  to  the  detriment  of  the  shipper,  or  improp- 
erly disclose  his  business  transactions  to  a  competitor.^  The 
soliciting  of  such  information  was  likewise  made  illegal.  An  act 
passed  March  4,  1911,  making  an  appropriation  for  the  naval 
service  for  the  fiscal  year  ending  June  30,  191 2,  provided  that 
"no  part  of  this  appropriation  shall  be  expended  for  the  pur- 
chase of  armor  or  armament  from  any  persons,  firms  or  corpora- 
tions, that  have  entered  into  any  combination,  agreement, 
conspiracy  or  understanding,  the  effect,  object  or  purpose  of 
which  is  to  deprive  the  Government  of  fair,  open  and  unre- 
stricted competition  in  letting  contracts  for  the  furnishing  of 
any  of  said  armor  or  armament. "  ^  The  act  making  appropria- 
tion for  the  fiscal  year  ending  June  30,  1913  (passed  August  22, 
191 2),  contained  a  similar  provision,  somewhat  modified  in  its 
phraseology,  which  applied  not  only  to  armor  and  armament, 
but  also  to  structural  steel,  ship  plates,  and  machinery.^ 

1  Cong.  Record,  January  13,  1913,  p.  1434. 
^37  Statutes  at  Large,  part  I,  p.  731. 
^  36  Statutes  at  Large,  part  I,  p.  553. 
4  Ibid.,  p.  1288. 
6  37  Statutes  at  Large,  part  I,  p.  355. 


332        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

The  act  providing  for  the  opening  and  operation  of  the  Pan- 
ama Canal,  passed  August  24,  19 12,  contained  a  clause  for- 
bidding the  use  of  the  canal  to  any  ship  owned,  chartered, 
operated,  or  controlled  by  any  person  or  company  that  was 
doing  business  in  violation  of  the  Sherman  Act  of  1890,  or 
sections  seventy-three  to  seventy-seven  of  the  Wilson  Tariff 
Act  of  1894,  or  any  act  amending  or  supplementing  either  of 
these.  ^  The  question  of  fact  was  to  be  determined  by  the 
courts  upon  the  institution  of  suit  by  the  shipper  or  the  Attorney 
General  against  the  owners  or  operators  of  the  ship.  In  1913 
also  (by  the  passage  of  H.  R.  25002)  sections  73  and  76  of  the 
Wilson  Tariff  Act  of  1894  were  modified  slightly.- 

In  addition  to  these  bills,  a  number  of  resolutions  were 
adopted.  Among  them  were:  a  House  resolution  requesting 
the  President  to  furnish  it  with  information  concerning  a  com- 
bination between  the  United  States  Steel  Corporation  and  its 
subsidiary  companies;  ^  a  House  resolution  appointing  a  com- 
mittee (Mr.  Hardwick,  chairman)  to  investigate  the  American 
Sugar  Refining  Company;^  a  House  resolution  appointing  a 
committee  (Mr.  Stanley,  chairman)  to  investigate  the  United 
States  Steel  Corporation;  ^  a  Senate  resolution  appointing  a  com- 
mittee (Mr.  Clapp,  chairman)  to  report  desirable  changes  in  the 
laws  controUing  corporations  engaged  in  interstate  commerce;  ^ 
a  House  resolution  to  investigate  the  money  trust  (Mr.  Pujo 
chairman) ;  ^  and  a  House  resolution  directing  the  Attorney 
General  to  inform  it  whether  there  was  a  smelter  trust  in  the 
United  States,  including  the  American  Smelting  and  Refining 
Company.* 

1 37  Statutes  at  Large,  part  I,  p.  567. 
2  See  37  Statutes  at  Large,  part  I,  p.  667. 
^  Cong.  Record,  June  16,  1910,  p.  8249. 
•'Ibid.,  May  9   1911,  p.  1147. 
» Ibid.,  May  16,  1911,  p.  1234. 
«  Ibid.,  July  26,  1911,  p.  3226. 
^  Ibid.,  February  24,  1912,  p.  2419 
8  Ibid.,  March  12,  191 2,  p.  3200 


CHAPTER  XV 
THE  TRUST  LEGISLATION  OF  1914^ 

LEGISLATIVE  HISTORY 

As  the  end  of  President  Taft's  administration  drew  near  it  be- 
came clear  that  no  important  trust  legislation  would  be  enacted. 
The  Democratic  party  in  the  summer  of  191 2  nominated  Wood- 
row  Wilson  as  its  candidate  for  the  presidency,  and  adopted  a 
platform  promising  warfare  on  industrial  monopoly.  The  plat- 
form repeated  the  old  battle  cry,  "a  private  monopoly  is  indefen- 
sible and  intolerable,"  and  demanded  the  enactment  of  such 
additional  legislation  as  might  be  necessary  to  make  it  impos- 
sible for  a  private  monopoly  to  exist  in  the  United  States." 
Legislation  to  prevent  holding  companies,  interlocking  direct- 
orates, price  discrimination,  and  stock-watering  was  urged. 
Regret  was  expressed  that  the  Sherman  Act  through  judicial 
construction  had  lost  much  of  its  efficacy,  and  legislation  to 
restore  its  effectiveness  was  recommended.  Finally,  the  dec- 
laration was  made  that  ardcles  produced  by  trusts  should  be 
placed  upon  the  free  list. 

The  RepubHcan  platform  affirmed  the  opposition  of  the  Re- 
publican party  to  special  privilege  and  monopoly;  congratulated 
the  party  upon  the  passage  of  the  Sherman  Act,  and  its  successful 
enforcement;  and  asserted  that  the  party  would  take  no  back- 

1  On  the  trust  legislation  of  1914  see:  Congressional  Record;  Commercial 
and  Financial  Chronicle;  Durand,  The  Trust  Problem,  ch.  5;  Young, 
The  Sherman  Act  and  the  New  Anti-Trust  Legislation,  Journal  of  Political 
Economy,  23,  pp.  201-220,  305-326,  and  417-436;  Stevens,  American 
Economic  Review,  4,  pp.  840-855,  and  5,  pp.  38-54;  Seager.  Political  Science 
Quarterly,  30,  pp.  448-462;  Montague,  The  Federal  Trade  Commission  and 
the  Clayton  Act,  in  Stetson,  Some  Legal  Phases  of  Corporate  Financing, 
Reorganization  and  Regulation,  pp.  275-326;  House  Report  no.  627,  63rd 
Cong.,  2nd  Sess.;  Senate  Report  no.  698,  63rd  Cong.,  2nd  Sess. 

2  Campaign  Text  Book  of  Democratic  Party,  191 2,  pp.  2,  6. 

333 


334       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

ward  step  to  permit  the  reestablishment  of  intolerable  con- 
ditions.^ It  advocated  the  enactment  of  supplementary  legis- 
lation defining  as  criminal  those  specific  acts  that  uniformly 
characterized  attempts  to  restrain  and  monopolize  trade,  to  the 
end  that  those  who  desired  to  obey  the  law  might  have  a  guide 
for  their  action,  and  that  those  who  intended  to  violate  it  might 
not  escape  punishment.  Finally,  it  suggested  the  creation  of  a 
federal  trade  commission,  which  would  perform  many  of  the 
functions  then  exercised  by  the  courts. 

More  vigorous  in  tone  was  the  platform  of  the  newly  created 
Progressive  party.  The  trust  plank  of  this  platform,  represent- 
ing the  views  of  the  leader  of  the  party,  urged  the  creation  of  a 
federal  administrative  commission  to  exercise  somewhat  the 
same  degree  of  control  over  trusts  that  the  Interstate  Commerce 
Commission  exercised  over  interstate  railways.-  This  commis- 
sion, it  became  apparent  from  Mr.  Roosevelt's  utterances,  was 
to  regulate  trusts — whenever  competition  could  not  be  restored — 
and  to  fix  the  prices  of  the  articles  produced  by  them,  when 
necessary.^  Mr.  Roosevelt  favored,  it  is  true,  the  enactment  of 
additional  legislation  to  prohibit  certain  unfair  trade  practices, 
such  as  local  price  discrimination  and  rebates,  the  elimination 
of  which,  he  held,  would  lead  to  the  restoration  of  competition 
in  some  instances;  but  he  differed  fundamentally  from  the 
Democratic  and  Republican  candidates  in  proposing  to  recog- 
nize some  trusts  as  a  natural  evolution  instead  of  as  a  fraud  on 
the  body  politic. 

In  the  election  campaign  of  the  fall  of  191 2  the  trust  question 
played  an  important  part.  Probably  the  tariff  and  the  trusts 
received  greater  attention  than  any  other  issues.  But  we  may 
not  conclude  that  the  stand  of  the  respective  candidates  on 
these  issues  determined  the  outcome  of  the  campaign.  What- 
ever the  issues  President  Taft  was  certain  to  be  defeated. 

1  Republican  Campaign  Text  Book,  1912,  pp.  272-273. 

2  The  platform  may  be  found  in  Roosevelt,  Progressive  Principles,  edited 
by  E.  H.  Youngman,  pp.  314-33°-    See  especially  p.  318. 

'See  Outlook,  99,  p.  655  (November  18,  1911);  and  102,  pp.  105-106 
(September  21,  191 2). 


THE  TRUST  LEGISLATION  OF  1914  335 

His  party  had  failed  to  keep  its  promise  to  revise  the  tarifT 
downward,  and  the  acquiescence  of  the  President  in  this  failure 
turned  the  people  against  him.  Already  in  1910  the  capture  of 
the  House  by  the  Democrats  attested  the  failure  of  his  admin- 
istration. When  there  was  added  to  this  state  of  affairs  the 
action  of  the  Old  Guard  in  defeating  the  will  of  the  Republicans 
(as  expressed  in  numerous  primaries),  by  the  nomination  of 
Mr.  Taft  as  their  candidate,  his  defeat  was  made  certain. 
Theodore  Roosevelt,  who  by  the  action  of  the  people  in  the 
primaries  was  entitled  to  the  Republican  nomination,  at  once 
organized  the  Progressive  party, — a  party  which  developed  a 
considerable  strength  because  of  the  popularity  of  its  leader,  the 
program  of  social  justice  for  which  it  stood,  and  no  doubt 
because  of  a  feeling  that  Mr.  Roosevelt  had  been  the  victim  of  a 
fraud.  But  the  result  of  the  election  was  never  in  doubt. 
Woodrow  Wilson  conducted  a  dignified  campaign,  in  which 
personalities  were  not  indulged  in,  confined  himself  largely  to  a 
few  issues  in  which  the  preceding  administration  had  made  a 
signal  failure,  and  received  an  enormous  majority  of  the  elec- 
toral votes. 

During  the  course  of  the  campaign  Mr.  Wilson  had  promised 
further  anti-trust  legislation.  As  he  had  said,  "I  take  my  stand 
absolutely,  where  every  progressive  ought  to  take  his  stand,  on 
the  proposition  that  private  monopoly  is  indefensible  and  intol- 
erable." ^  The  enactment  of  anti-trust  legislation,  however,  was 
to  wait  upon  the  completion  of  two  other  programs, — tariff 
reform  and  banking  reform.  The  Congress  which  was  called  in 
special  session  on  April  7,  1913,  passed  the  Simmons-Underwood 
tariff  bill  on  October  3,  1913 — a  measure  which,  in  view  of  the 
Democratic  doctrine  that  the  trusts  have  been  promoted  by  the 
tariff,  may  be  regarded  as  a  partial  remedy  for  the  trusts — and 
passed  the  Federal  Reserve  Act  on  December  23,  19 13.  The 
decks  were  now  cleared  for  trust  measures. 

The  message  of  the  President  on  trust  legislation  was  delivered 
to  Congress  in  person  on  January  20,  1914.^     His  trust  pro- 

^  Wilson,  New  Freedom,  p.  172. 

2  Cong.  Record,  January  20,  1914,  pp.  1962-64. 


336       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

gram  was  founded  on  the  conviction  that  "private  monopoly 
is  indefensible  and  intolerable," — a  proposition  which  he  held  all 
were  agreed  upon.  He  said  that  we  propose  to  be  the  spokesmen 
of  the  best  informed  men  of  the  business  world,  who  condemn  the 
methods  and  processes  and  consequences  of  monopoly  as  we 
condemn  them.  His  program  was  to  be  a  comprehensive  one, 
but  not  radical  or  unacceptable.  There  was  to  be  "nothing 
essential  disturbed,  nothing  torn  up  by  the  roots,  no  parts  rent 
asunder  which  can  be  left  in  wholesome  combination."  The 
object,  he  said,  was  not  to  unsettle  business,  but  to  pass  laws  to 
be  the  bulwarks  and  safeguards  of  industry  against  the  forces 
that  had  disturbed  it.  The  items  in  this  program  were:  first, 
laws  that  would  effectually  prevent  such  interlockings  of  the 
personnel  of  the  directorates  of  great  corporations  as  resulted  in 
making  those  who  affected  to  compete  in  fact  partners  and 
masters  of  some  whole  field  of  business.  Such  a  prohibition,  he 
said,  would  bring  new  men,  new  energies,  a  new  spirit  of  initia- 
tive, and  new  blood  into  the  management  of  our  great  business 
enterprises;  it  would  open  the  field  of  industrial  development  and 
origination  to  scores  of  men  who  had  been  obliged  to  serve  when 
their  abilities  entitled  them  to  direct.  Second,  a  law  that 
would  confer  upon  the  Interstate  Commerce  Commission  the 
power  to  superintend  and  regulate  the  financial  operations  by 
which  the  railroads  were  henceforth  to  be  supplied  with  the 
money  they  needed  for  their  proper  development.  Such  a  law 
was  to  be  one  step  toward  the  necessary  separation  of  the  busi- 
ness of  production  from  the  business  of  transportation.  Third, 
an  explicit  legislative  definition  of  the  policy  and  meaning  of  the 
existing  anti-trust  law,  a  prohibition  item  by  item  of  the  prac- 
tices of  monopoly  which  experience  had  disclosed,  in  order  that 
there  need  be  no  risk  of  falling  under  the  condemnation  of  the 
law  from  an  inability  to  find  out  just  what  the  law  was.  Fourth, 
the  creation  of  an  interstate  trade  commission.  This  body 
would  not  be  empowered  to  make  terms  with  monopoly  or  to 
assume  control  of  business;  rather  it  was  to  serve  as  an  instru- 
ment of  information  and  publicity,  and  to  assist  in  the  dissolu- 
tion of  concerns  which  had  combined  to  a  degree  inconsistent 


THE  TRUST  LEGISLATION  OF  1914  337 

with  the  public  interest  and  the  freedom  of  trade.  Fifth,  the 
establishment  of  the  principle  that  penalties  and  punishments 
should  fall  not  upon  business  itself,  to  its  confusion  and  interrup- 
tion, but  upon  the  individuals  who  used  the  instrumentalities  of 
business  to  do  things  which  public  policy  and  sound  business 
practice  condemned.  Every  act  of  business  is  done  at  the 
command  or  upon  the  initiative  of  some  ascertainable  person  or 
group  of  persons ;  and  these  should  be  held  individually  respon- 
sible and  the  punishment  should  fall  upon  them,  not  upon  the 
business  organization  of  which  they  made  illegal  use.  Sixth,  the 
prohibition  of  holding  companies.  The  President  presented  to 
Congress  for  its  consideration  the  question  whether  we  should 
require  individuals  owning  stock  in  several  companies  which 
ought  to  be  independent,  but  which  on  account  of  common  stock 
ownership  were  brought  under  a  common  control,  to  decide  in 
which  of  them  they  would  elect  the  right  to  vote.  Seventh, 
relief  for  the  individuals  who  had  been  injured  by  the  many  dis- 
lodging and  exterminating  forces  of  combination.  Private 
individuals  who  claim  to  have  been  injured  by  these  processes 
should  be  given  the  right,  he  held,  to  found  their  suits  for  redress 
upon  the  facts  and  judgments  proved  and  entered  in  suits  by  the 
government  when  the  government  had  upon  its  initiative  sued 
the  combinations  complained  of  and  won  its  suit.  It  was  not 
fair,  he  said,  that  the  private  litigant  should  be  obliged  to  estab- 
lish again  the  facts  which  the  government  had  already  proved. 
Immediately  upon  the  conclusion  of  the  President's  address 
the  House  voted  to  refer  that  part  of  the  message  which  related 
to  a  Trade  Commission  and  to  the  regulation  of  railway  securities 
to  the  Committee  on  Interstate  and  Foreign  Commerce,  and  the 
balance  to  the  Committee  on  the  Judiciary.^  Two  days  later  it 
was  publicly  announced  that  the  trust  legislation  would  be  em- 
bodied in  five  separate  bills:  (i)  a  Trade  Commission  bill;  (2)  an 
Interlocking  Directorates  bill;  (3)  a  Definitions  bill;  (4)  a  Trades 
Relations  bill,  deahng  with  unfair  competition;  and  (5)  a  Rail- 
road Securities  bill.^    Shortly  after  these  bills  had  been  made 

1  Cong.  Record,  January  20,  1914,  p.  1980. 
^Chron.,  98,  p.  273  (January  24,  1914), 


338        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

public,  hearings  upon  them  began.  Later  the  five  bills  were 
consolidated  into  three:  (i)  the  Trade  Commission  bill;  (2)  the 
Clayton  bill,  which  included  the  Interlocking  Directorates  bill 
and  the  Trade  Relations  bill  (the  Definitions  bill  was  dropped); 
and  (3)  the  Railroad  Securities  bill.  This  third  measure,  which 
was  to  give  the  Interstate  Commerce  Commission  authority 
to  regulate  the  issues  of  securities  by  common  carriers  and  to 
deal  with  interlocking  directorates  among  common  carriers,  was 
designed  to  prevent  the  occurrence  in  the  future  of  such  scandals 
as  the  Rock  Island  and  New  Haven  episodes.  The  bill  was 
passed  by  the  House  on  June  5  by  a  vote  of  325-12,^  but  early  in 
September  the  announcement  was  made  that,  in  view  of  the 
disturbed  conditions  created  by  the  European  War,  the  Presi- 
dent had  consented  to  the  postponement  of  the  measure.  Thus 
was  another  illustration  given  of  the  baneful  effect  of  war  on 
domestic  poHcies. 

Before  analyzing  in  some  detail  the  two  trust  bills  that  were 
enacted  into  law,  we  may  outline  briefly  their  legislative  history. 
The  first — the  Trade  Commission  bill  (H.  R.  121 20) — was  intro- 
duced in  the  House  on  January  22  by  Representative  Clayton, 
and  referred  by  the  House  to  the  Committee  on  Interstate  Com- 
merce.^ At  the  same  time  this  bill  was  introduced  in  the  Senate 
as  S.  4160.  During  the  course  of  the  comrrtittee  hearings  it 
became  apparent  that  the  bill  did  not  fully  carry  out  the  ideas  of 
the  President,  and  therefore  Chairman  Adamson  on  February  16 
appointed  a  sub-committee,  of  which  Representative  Covington 
of  Maryland  was  made  chairman,  to  draft  a  new  bill.^  On 
March  14  Mr.  Covington  introduced  in  the  House  a  new  bill 
(H.  R.  1463 1),  which  represented  the  unanimous  views  of  the 
sub-committee.^  This  bill  was  referred  to  the  Committee  on 
Interstate  Commerce.  One  month  later  (April  13)  a  new  bill 
(H.  R.  1 56 13),  a  revised  draft  of  the  former  bill,  was  introduced 
by  Representative  Covington,  and  referred  by  the  House  to  the 

'  Cong.  Record,  June  5,  1914,  p.  9912. 

*  Ibid.,  January  22,  1914,  pp.  2142,  2150-1, 
'  Chron.,  98,  p.  567  (February  21,  1914), 

*  Cong.  Record,  March  14,  1914,  p.  4886, 


THE  TRUST  LEGISLATION  OF  1914  339 

Committee  on  Interstate  Commerce.^  The  next  day  this  com- 
mittee reported  the  bill  to  the  House  without  amendment, 
accompanied  by  a  report  (no.  533)."  The  committee  in  its  report 
stated  that  the  bill  provided  for  a  trade  commission  in  accord- 
ance with  the  views  of  the  President  as  expressed  in  his  message 
to  Congress.  The  bill  was  framed  on  the  principle  of  preserving 
competitive  conditions  in  interstate  commerce;  the  commission 
had  not  been  given  power  to  make  terms  with  monopoly,  to  regu- 
late prices  or  production,  to  declare  any  particular  corporation 
or  agreement  innocuous,  or  to  issue  orders.  The  report  was  con- 
curred in  by  all  the  Democratic  members  of  the  committee  except 
two  who  did  not  believe  the  bill  was  sufficiently  drastic,  and  by 
all  the  Republican  members  of  the  committee;  in  fact  the  prep- 
aration of  the  bill  and  its  course  through  Congress  were  marked 
by  a  comparative  absence  of  political  considerations,  the  Repub- 
licans cooperating  with  the  Democrats  to  effect  its  passage.  In 
part  this  fortunate  state  of  affairs  was  due  to  the  widespread  de- 
mand for  the  establishment  of  a  commission — the  poll  conducted 
by  the  Chamber  of  Commerce  of  the  United  States  was  eloquent 
testimony  as  to  the  strength  of  this  demand — and  in  part  it  was 
due  to  the  skill  and  courtesy  of  Representative  Covington,  who 
carefully  avoided  stirring  up  antagonisms  or  factional  differences. 
On  May  19  debate  on  the  bill  began  in  the  House.  Amended  in 
only  one  particular  (and  that  a  minor  one),  the  bill  passed  the 
House  on  June  5,  1914.^  The  vote  on  the  measure  was  not 
recorded,  but  that  the  opposition  to  its  passage  was  shght  is 
attested  by  the  fact  that  a  motion  to  recommit  the  bill,  offered  by 
Representative  Murdock  of  Kansas  (a  Progressive),  was  de- 
feated by  a  vote  of  151  to  19.^  (Not  all  of  the  nineteen,  however, 
were  to  be  regarded  as  hostile  to  the  measure,  for  Mr.  Murdock 
himself  stated  that  he  was  not  opposed  to  the  passage  of  the  bill.) 
The  House  bill  was  referred  by  the  Senate  to  the  Committee  on 
Interstate  Commerce;  and  on  June  13  was  reported  from  the 

1  Cong.  Record,  April  13,  1914,  p.  6648. 

2  Ibid.,  April  14,  1914,  p.  6714. 
*  Ibid.,  June  5,  1914,  p.  9910. 

^  Ibid. 


340       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

committee.  The  action  of  the  committee  consisted  in  striking 
out  all  of  the  House  bill  except  the  enacting  clause,  and  substitut- 
ing therefor  the  provisions  of  the  Senate  bill  (S.  4160),  with  the 
addition  of  several  sections  dealing  with  unfair  competition  and 
foreign  trade  practices.  On  June  25  the  Senate  took  up  the  con- 
sideration of  this  bill.  Debate  upon  it  occupied  a  large  share  of 
the  Senate's  attention  during  the  month  that  followed,  the 
principal  bone  of  contention  being  the  unfair  competition  provi- 
sions which  had  been  added  to  the  bill  by  the  Senate  Committee. 
On  July  22  the  Democratic  members  of  the  Senate  at  a  caucus 
agreed  that  the  bill  should  be  kept  constantly  before  the  Senate 
until  its  final  disposition.^  Finally  on  August  4  a  unanimous 
consent  agreement  was  entered  into  that  the  Senate  would  vote 
on  the  bill  not  later  than  August  5."  On  that  day  the  bill, 
amended  in  many  particulars,  passed  the  Senate  by  a  vote  of 
53  to  16,  27  not  voting.^  Only  two  Democrats  voted  against  the 
bill  (though  quite  a  number  were  absent)  and  twelve  Republi- 
cans voted  for  it. 

The  House  disagreeing  to  the  amendments  of  the  Senate,  a 
conference  became  necessary.  The  conference  committee 
labored  over  the  bill  for  nearly  a  month,  endeavoring  to  agree 
upon  a  measure  that  would  include  the  fundamental  provisions 
of  both  bills.  On  September  4  the  result  of  their  labors  was 
presented  to  the  Senate  and  to  the  House.  The  conference  report 
was  agreed  to  in  the  Senate  on  September  8  by  a  vote  of  43-5,^ 
the  main  features  of  the  debate  being  the  exceeding  difficulty 
experienced  in  maintaining  a  quorum.  The  conference  report 
was  taken  up  in  the  House  on  the  loth.  Representative  Mann  of 
Illinois,  the  leader  of  the  opposition,  expressed  the  prevailing 
sentiment  when  he  said  that  the  discussion  on  the  bill  had  been 
devoid  of  partisan  politics  from  the  start,  and  that  it  was  a  good 
bill.^    The  House  on  the  loth  agreed  to  the  conference  re- 

1  Chron.,  99,  p.  238  (July  25,  1914). 

2  Cong.  Record,  August  4,  1914,  p.  13235,  ' 
'  Ibid.,  August  5,  1914,  p.  13319- 

*Ibid.,  September  8,  1914,  p.  14802. 
6  Ibid.,  September  10,  1914,  p.  14940. 


THE  TRUST  LEGISLATION  OF  1914  341 

port.^     Nothing    now    remained    but    the    signature    of    the 
President;  and  this  was  affixed  on  September  26,  1914. 

The  second  of  the  trust  measures — the  Clayton  bill  (H.  R. 
15657) — was  introduced  in  the  House  on  April  14.-  Of  the 
three  tentative  bills  before  the  Committee  on  the  Judiciary  one 
(the  Definitions  bill)  had  been  dropped,  and  the  other  two  had 
been  consolidated.  A  Definitions  bill  had  been  urged  by  Presi- 
dent Wilson  in  his  message  to  Congress,  but  the  objection  was 
raised  that  a  specific  enumeration  of  offenses  under  the  act  might 
limit  the  scope  of  the  anti- trust  acts.  The  Attorney  General,  for 
example,  expressed  the  opinion  that  a  legislative  definition  of 
offenses  might  weaken  the  act.  Moreover,  it  was  certain  that  it 
would  be  years  before  the  various  offenses  defined  in  the  bill 
would  receive  judicial  interpretation.  Apparently  the  President 
became  convinced  of  the  force  of  these  objections;  and  as  a  re- 
sult the  Definitions  bill  was  dropped.  The  remaining  bills  (the 
Interlocking  Directorates  bill  and  the  Trade  Relations  bill), 
with  some  new  matter,  were  consolidated  into  one, — the  Clayton 
bill.  As  one  commentator  has  put  it,  two  separate  measures 
were  better  targets  for  criticism  than  a  single  bill,  and  at  the 
same  time  they  did  not  afford  as  good  a  rallying-ground  for  those 
who  were  willing  to  support  the  administration.^  The  Clayton 
bill  was  referred  by  the  House  to  the  Committee  on  the  Judi- 
ciary. On  May  6  the  bill  was  reported  from  the  committee  with 
an  amendment,  accompanied  by  a  report  (no.  627).'*  Debate  on 
the  bill  began  on  May  22.  It  occupied  the  attention  of  the  House 
until  June  5,  when  it  was  passed  with  its  amendments  by  a  vote 
of  277  to  54.^  Only  one  Democrat  voted  against  it,  while  forty- 
three  Republicans  and  sixteen  Progressives  voted  for  it.^  In 
spite  of  the  charge  made  against  the  bill  that  it  was  conceived  in 
a  spirit  of  partisanship  in  marked  contrast  to  the  Trade  Commis- 

^  Cong.  Record,  September  10,  1914,  p.  14933. 
^  Ibid.,  April  14,  1914,  p.  6714. 

*  Young,  Journal  of  Political  Economy,  23,  p.  320. 

*  Cong.  Record,  May  6,  1914,  p.  8201. 
^  Ibid.,  June  5,  1914,  p.  Q911. 

*  Chron.,  98,  p.  1814  (June  13,  1914). 


342       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

sion  bill,  it  received  the  support  of  a  large  number  of  Republicans 
and  Progressives. 

The  Clayton  bill  was  presented  to  the  Senate,  and  on  June  6 
referred  to  the  Committee  on  the  Judiciary. ^  On  the  2  and  of  July 
it  was  reported  out  with  amendments  and  with  a  report  (no.  698).^ 
Consideration  of  the  bill  by  the  Senate  in  Committee  of  the 
Whole  was  begim  on  August  1 1 ;  and  for  the  next  three  weeks  the 
Senate  concentrated  its  attention  upon  it.  On  September  2  the 
measure,  amended  in  many  vital  particulars,  passed  the  Senate 
by  a  vote  of  46-16.^  The  forty-six  votes  for  the  measure  were 
cast  by  thirty-eight  Democrats,  seven  Republicans,  and  one 
Progressive.  The  sixteen  votes  in  opposition  were  all  cast  by 
Republicans. 

The  amendments  to  the  House  bill  made  by  the  Senate  were 
numerous  and  far-reaching,  and  a  conference  was  therefore 
necessary.  The  report  of  the  conference  committee  was  pre- 
sented to  the  Senate  on  September  23,  read  on  September  26, 
and  taken  up  for  debate  on  September  28.  Vigorous  objection  to 
the  report  was  made,  particularly  by  Senator  Reed  of  Missouri, 
who  held  that  the  teeth  had  been  removed  from  the  bill,  his 
principal  objection  being  the  failure  of  the  conferees  to  retain  the 
criminal  penalties  provided  for  by  the  House.  In  order  to  effect 
the  restoration  of  the  criminal  penalties,  he  made  a  motion  on 
October  5  to  recommit  the  bill  to  conference.  This  was  defeated 
by  a  vote  of  35-25.'*  The  Senate  thereupon  by  a  vote  of  35-24 
agreed  to  the  conference  report.^  On  October  7  the  report  was 
taken  up  in  the  House,  and  the  next  day  the  report  was  agreed 
to  by  a  vote  of  245-52.^  The  signature  of  the  President  was 
affixed  on  October  15,  1914,  thus  bringing  to  a  conclusion  the 
anti-trust  legislation  of  the  year. 

THE  TRADE  COMMISSION  ACT 

In  describing  the  provisions  of  the  Trade  Commission  Act 
we  shall  take  up,  first,  the  organization  of  the  Commission; 

^  Cong.  Record,  June  6,  1914,  p.  9929.       *  Ibid.,  October  5,  1914,  p.  161 70. 

^Ibid.,  July  22,  1914,  p.  12468.  ^  Ibid. 

*  Ibid.,  September  2,  1914,  p.  14610.       *  Ibid.,  October  8,  1914,  p.  16344. 


THE  TRUST  LEGISLATION  OF  1914  '     343 

second,  its  principal  powers  and  duties;  and  third,  some  miscel- 
laneous provisions. 

Organization  of  the  Commission 

The  act  provided  for  the  creation  of  a  Federal  Trade  Commis- 
sion of  five  members  to  be  appointed  by  the  President,  with  the 
advice  and  consent  of  the  Senate.  The  salary  of  each  member 
was  fixed  at  $10,000  a  year;  and  the  term  of  office  at  seven  years, 
except  for  the  first  appointees,  who  were  to  serv'e  for  three, 
four,  five,  six,  and  seven  years,  and  except  for  appointments  to 
fill  vacancies,  in  which  case  the  unexpired  term  was  to  be  filled 
out.  Not  more  than  three  of  the  five  commissioners  might  be 
of  the  same  political  party.  No  commissioner  might  engage 
in  any  other  business,  vocation,  or  employment.  The  commis- 
sioners might  be  removed  by  the  President  for  inefi&ciency, 
neglect  of  duty,  or  malfeasance  in  office. 

Upon  the  organization  of  the  Commission  and  the  election  of 
its  chairman,  the  Bureau  of  Corporations  and  the  offices  of  the 
Commissioner  and  Deputy  Commissioner  of  Corporations  were 
to  cease  to  exist;  but  the  Commission  was  to  continue  all  the 
pending  investigations  and  proceedings  of  the  Bureau,  to  retain 
all  the  clerks  and  employees  of  the  Bureau  at  their  former  grades 
and  salaries,  and  to  take  possession  of  all  the  records,  papers, 
and  property  of  the  Bureau,  including  any  unexpended  funds. 

The  Commission  was  to  appoint  a  secretary  at  a  salary  of 
$5,000  a  year,  and  to  have  authority  to  employ  and  fix  the  com- 
pensation of  such  attorneys,  special  experts,  examiners,  clerks, 
and  other  employees  as  it  might  from  time  to  time  find  neces- 
sary, and  for  whom  Congress  might  from  tune  to  time  make 
appropriation.  With  the  exception  of  the  secretary,  a  clerk  to 
each  commissioner,  the  attorneys,  and  the  special  experts  and 
examiners,  all  employees  of  the  commission  were  to  be  a  part 
of  the  classified  civil  service. 

Powers  and  Duties  of  the  Commission 
The  principal  powers  of  the  Commission  may  be  classified 


344        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

under  two  heads:  I.  Investigation;  II.  The  prevention  of  unfair 
methods  of  competition  in  commerce.^ 

I.  The  powers  of  investigation  possessed  by  the  Commission 
are  primarily  those  that  relate:  (A),  to  all  corporations  engaged 
in  commerce,  other  than  banks  and  common  carriers;  and  (B), 
to  all  corporations  guilty  or  alleged  to  be  guilty  of  violating  the 
anti-trust  laws.  The  first  set  of  powers  obviously  relates  to  a 
larger  number  of  corporations;  but  the  second  set  relates  to  a 
greater  variety,  for  it  includes  not  only  industrial  corporations, 
but  also  banks  and  common  carriers,  which  as  to  their  ordinary 
operations  are  under  the  control  of  other  government  bodies. 

A.  The  powers  of  investigation  that  relate  to  those  corpora- 
tions engaged  in  comm^erce  which  are  within  the  especial  juris- 
diction of  the  Commission  (industrial  corporations)  are: 

(i)  "To  gather  and  compile  information  concerning,  and  to 
investigate  from  time  to  time  the  organization,  business,  con- 
duct, practices,  and  management  of  any  corporation  engaged  in 
commerce,  excepting  banks  and  common  carriers  subject  to 
the  Act  to  regulate  commerce,  and  its  relation  to  other  corpora- 
tions and  to  individuals,  associations,  and  partnerships."^ 
This  power  is  only  a  little  broader  than  that  possessed  by  the 
Bureau  of  Corporations.  The  main  differences  are  that  the 
Bureau  of  Corporations  in  its  investigations  was  subject  to  the 
direction  and  control  of  the  Secretary  of  Commerce  and  Labor, 
whereas  the  Federal  Trade  Commission  is  not;  that  the  Bureau 
was  not  specifically  authorized  to  investigate  "business" 
and  "practices,"  as  well  as  organization,  conduct,  and  manage- 
ment; and  that  the  authority  of  the  Bureau  included  banks,  while 
that  of  the  Commission  does  not. 

(2)  To  require,  by  general  or  special  orders,  the  corporations 
subject  to  its  especial  control  to  file  with  it  "in  such  form  as  the 

»The  term  commerce  as  defined  in  the  act  means  "commerce  among  the 
several  States  or  with  foreign  nations,  or  in  any  Territory  of  the  United 
States  or  in  the  District  of  Columbia,  or  between  any  such  Territoiy  and 
another,  or  between  any  such  Territory  and  any  State  or  foreign  nation, 
or  between  the  District  of  Columbia  and  any  State  or  Territory  or  foreign 
nation." 

2  Section  six  (a). 


THE  TRUST  LEGISLATION  OF  1914  34^ 

commission  may  prescribe"  annual  or  special  reports,  or  answers 
in  writing  to  specific  questions,  furnishing  to  the  Commission 
such  information  as  it  may  require  regarding  their  organization, 
business,  conduct,  practices,  management,  and  their  relation 
to  other  corporations,  partnerships,  and  individuals.  These 
reports  and  answers  are  to  be  made  under  oath,  or  otherwise, 
as  the  Commission  may  prescribe,  and  to  be  filed  within  such 
reasonable  period  as  the  Commission  may  set.^  Any  corpora- 
tion which  fails  to  file  the  annual  or  special  report  within  the 
time  fixed  by  the  Commission  is  subject  to  a  penalty  of  $100  per 
day,  to  be  recovered  by  the  Department  of  Justice,  and  paid 
into  the  Treasury  of  the  United  States.-  Moreover,  any  person 
who  willfully  makes,  or  causes  to  be  made,  any  false  entry  or 
statement  of  fact  in  any  report  made  to  the  Commission,  or  who 
willfully  makes  any  false  entry  in  any  account,  record,  or  memo- 
randvmi  kept  by  any  corporation  subject  to  this  act,  or  who  will- 
fully neglects  to  make  full  and  correct  entries  in  such  accounts, 
etc.,  of  all  transactions  pertaining  to  the  business  of  the  corpora- 
tion, or  who  willfully  removes  out  of  the  jurisdiction  of  the 
United  States,  or  willfully  alters  or  by  any  means  falsifies,  any 
documentary  evidence  of  such  corporation,  is  subject  to  a  fine 
of  not  less  than  $1,000  nor  more  than  $5,000,  or  to  imprison- 
ment for  a  term  not  to  exceed  three  years,  or  to  both  such  fine 
and  imprisonment.^  The  House  and  the  Senate  bills  had  pro- 
vided that  the  Commission  might  prescribe  "as  near  as  may  be  a 
uniform  system  of  annual  reports."  This  was  modified  to  read 
that  these  reports,  including  the  special  reports,  should  be  made 
"in  such  form  as  the  commission  may  prescribe."  In  giving 
the  Commission  power  to  call  for  annual  and  special  reports  the 
Trade  Commission  Act  represents  a  distinct  advance  over  the 
act  creating  the  Bureau  of  Corporations.  In  the  latter  act  there 
was  no  compulsory  power  provided  whereby  the  Bureau  could 
obtain  regular  reports,  even  assuming,  what  is  unlikely,  that  the 

1  Section  sLx  (b). 

2  Section  ten.    The  penalty  does  not  lie  until  thirty  days  after  the  date 
set  by  the  Commission. 

^  Section  ten. 


346       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

general  powers  of  investigation  conferred  on  the  Bureau  included 
the  power  to  call  for  reports.  But  in  the  Trade  Commission 
Act  the  power  is  specifically  given,  and  a  penalty  is  provided. 

(3)  The  Commission  has  power  to  classify  corporations  from 
time  to  time,  and  to  make  rules  and  regulations  for  the  purpose 
of  carrying  out  the  provisions  of  the  act.^  It  is  not  clear  just 
what  the  significance  of  this  clause  is.  Mr.  Stevens  holds  that 
the  effect  of  this  provision  combined  with  the  power  to  call  for 
reports  is  apparently  to  give  the  Commission  the  power  in  its 
discretion  to  make  a  classification  of  corporations,  and  then,  if 
the  Commission  deems  it  fitting,  to  prescribe  a  uniform  system 
of  accounting  for  the  reports  of  all  members  of  each  class.^ 
However,  neither  the  Commission  nor  the  courts  have  as  yet 
passed  upon  the  meaning  of  this  subsection. 

B.  We  come  now  to  those  powers  of  investigation  that  relate 
to  corporations  guilty  or  alleged  to  be  guilty  of  violating  the 
anti-trust  laws.  To  some  extent  the  powers  to  be  now  considered 
are  broader  than  those  of  mere  investigation,  but  they  may  be 
included  here,  since  they  embrace  in  every  instance  thorough 
investigation.      The    Commission   has    the   following   powers: 

(4)  "Upon  the  direction  of  the  President  or  either  House  of 
Congress  to  investigate  and  report  the  facts  relating  to  any 
alleged  violations  of  the  antitrust  Acts  by  any  corporation."  ^ 
In  the  House  and  Senate  bills  the  Commission  was  made  subject 
in  this  matter  to  the  direction  of  the  Attorney  General  also,  but 
in  view  of  the  fact  that  the  Attorney  General  was  the  head  of  an 
executive  department,  it  was  concluded  that  the  direction  of  the 
President  would  be  sufficient.  Accordingly  this  provision  was 
eliminated  in  conference.  It  is  expected  that  the  effect  of  this 
clause  will  be  to  transfer  to  the  Commission  much  of  the  work 
of  investigation  formerly  carried  on  by  the  Department  of  Jus- 
tice. 

(5)  ''Upon  the  application  of  the  Attorney  General  to  in- 
vestigate and  make  recommendations  for  the  readjustment  of 

1  Section  six  (g). 

2  Stevens,  American  Economic  Review,  4,  pp.  849-850. 

3  Section  six  (d). 


THE  TRUST  LEGISLATION  OF  1914  347 

the  business  of  any  corporation  alleged  to  be  violating  the  anti- 
trust Acts  in  order  that  the  corporation  may  thereafter  main- 
tain its  organization,  management,  and  conduct  of  business  in 
accordance  with  law."  ^  It  will  be  noticed  that  the  Commission 
exercises  this  power  only  upon  the  application  of  the  Attorney 
General,  and  that  the  Attorney  General  is  under  no  compulsion 
to  accept  the  recommendations  of  the  Commission.  Should 
there  be  cooperation  between  these  two  bodies — as  Congress 
doubtless  intended — this  provision  will  prove  helpful.-  The 
increasing  activity  of  the  Department  of  Justice  in  recent  years 
has  engendered  in  a  number  of  concerns  the  desire  to  readjust 
their  business  in  such  a  way  as  to  a^'oid  a  government  suit. 
Having  proven  unsuccessful  in  securing  the  establishment  of  a 
Commission  with  power  to  give  them  an  "immunity  bath," 
i.  e.,  to  pass  on  the  reasonableness  of  their  agreements,  these 
concerns  desire  an  assurance  that  they  will  not  be  prosecuted  by 
the  Attorney  General  then  in  office.  This  assurance  they  can 
now  obtain  by  a  readjustment  of  their  affairs  in  a  manner  ap- 
proved by  the  Department  of  Justice.  It  is  highly  desirable 
that  these  voluntary  reorganizations  be  promoted,  as  they  effect 
the  desired  end  without  the  delay  and  expense  of  court  proceed- 
ings. And  it  was  the  opinion  of  Congress  that  the  Commission 
was  better  constituted  than  the  Department  of  Justice  to  sug- 
gest a  satisfactory  economic  reorganization,  lea^•ing  to  the  De- 
partment the  acceptance  of  the  plan  as  being  legally  satisfac- 
tory. 

(6)  Upon  the  request  of  the  court,  and  as  a  master  in  chan- 
cery, to  ascertain  and  report  an  appropriate  form  of  decree 
in  any  suit  in  equity  brought  under  the  direction  of  the  Attorney 
General  as  provided  in  the  anti-trust  acts."  The  court  may  adopt 
or  reject  the  report  in  whole  or  in  part,  and  may  enter  such  de- 

*  section  sLx  (e). 

2  Down  to  May,  1920,  the  Attorney  General  had  called  upon  the  Commis- 
sion for  recommendations  only  twice:  once  in  the  case  of  certain  news  print 
manufacturers,  and  once  in  the  case  of  the  California  Raisin  Association. 
Correspondence  with  Federal  Trade  Commission. 

2  Section  seven. 


348        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

cree  as  it  judges  proper.  This  provision,  should  the  courts  take 
advantage  of  it,  will  prove  distinctly  helpful.  The  formulation 
of  a  decree,  particularly  a  dissolution  decree,  is  an  exceedingly 
difficult  matter, — one  calling  for  skill,  judgment,  and  detailed 
technical  knowledge  of  the  industry  involved.  The  exigencies 
of  the  situation  may  require  that  the  trust  be  split  up  into  a 
nimiber  of  separate  units.  These  units  must  not  be  so  large 
as  to  make  competition  between  them  unlikely;  nor  must  they 
be  so  small  as  to  sacrifice  efficiency.  The  problem  is  thus  pri- 
marily economic,  rather  than  legal;  and  the  provision  for  the 
preparation  of  a  decree  by  the  Trade  Commission  is  an  indication 
that  Congress  recognized  this  to  be  the  case.^  Should  the  courts 
invoke  the  aid  of  the  Commission,  it  is  unlikely  that  dissolution 
decrees  as  ineffective  as  those  in  the  oil  and  tobacco  cases  will 
be  again  entered.  It  is  true  that  the  Attorney  General  invoked 
the  aid  of  the  Bureau  of  Corporations  in  the  dissolution  of  the 
tobacco  trust,  and  that  the  principal  expert  of  the  Bureau  re- 
ported that  the  distribution  of  business  under  the  plan  was 
economically  satisfactory.-  Yet  there  is  considerable  difference 
between  an  official  of  the  Bureau  acting  extra-officially  and  five 
Trade  Commissioners  performing  a  service  specifically  provided 
for  in  the  law,  in  order  that  earlier  farces  may  not  be  repeated. 
However,  to  date  ^  the  courts  have  not  availed  themselves  of  the 
benefits  of  this  section. 

(7)  "Whenever  a  final  decree  has  been  entered  against  any 
defendant  corporation  in  any  suit  brought  by  the  United  States 
to  prevent  and  restrain  any  violation  of  the  antitrust  Acts,  to 
make  investigation,  upon  its  own  initiative,  of  the  manner  in 
which  the  decree  has  been  or  is  being  carried  out,  and  upon  the 

1  Attorney  General  Wickersham  in  his  Annual  Report  for  191 1  (p.  6) 
stated  that  the  problems  involved  in  working  out  the  tobacco  dissolution 
plan  were  economic  rather  than  legal,  and  admitted  that  neither  the  courts 
nor  the  Department  of  Justice  were  properly  equipped  to  work  out  such 
problems,  save  in  exceptional  cases. 

^Annual  Report  of  the  Attorney  General,  191 1,  p.  7. 

'  May,  1920.  In  the  glucose  case  a  lower  court  requested  the  Commission 
to  prepare  a  dissolution  decree;  but  the  case  was  appealed,  and  the  Commis- 
sion did  not  actually  prepare  a  decree. 


THE  TRUST  LEGISLATION  OF  1914  349 

application  of  the  Attorney  General  it  shall  be  its  duty  to  make 
such  investigation.  It  shall  transmit  to  the  Attorney  General 
a  report  embodying  its  findings  and  recommendations  as  a 
result  of  any  such  investigation,  and  the  report  shall  be  made 
public  in  the  discretion  of  the  commission."  ^  This  provision 
was  taken  from  the  House  bill,  except  that  in  that  bill  the  Com- 
mission was  required  to  investigate  on  its  own  initiative  into  the 
observance  of  the  decree,  whereas  in  the  act  the  Commission  is 
required  to  investigate  only  upon  the  request  of  the  Attorney 
General.  This  function  is  one  that  was  formerly  exercised  by 
the  Department  of  Justice,  but  especial  legislative  provision 
for  its  exercise  by  the  Commission  either  on  its  own  initiative 
or  upon  the  initiative  of  the  Department  of  Justice  will  doubtless 
cause  it  to  be  performed  more  regularly  and  conscientiously. 

(8)  "To  investigate,  from  time  to  time,  trade  conditions  in 
and  with  foreign  countries  where  associations,  combinations, 
or  practices  of  manufacturers,  merchants,  or  traders,  or  other 
conditions,  may  affect  the  foreign  trade  of  the  United  States, 
and  to  report  to  Congress  thereon,  with  such  recommendations 
as  it  deems  advisable."  ^ 

(9)  To  make  public  from  time  to  time  such  portions  of  the 
infonnation  obtained  by  it,  except  trade  secrets  and  the  names 
of  customers,  as  it  shall  deem  expedient  in  the  public  interest; 
and  to  make  annual  and  special  reports  to  Congress,  and  to  sub- 
mit therewith  recommendations  for  additional  legislation;  and 
to  provide  for  the  publication  of  its  reports  and  decisions.^ 
The  ability  of  the  Commission  to  determine  for  itself  what  in- 
formation it  shall  make  public,  rather  than  have  the  matter 
determined  by  the  President,  gives  it  added  prestige.  It  is  to 
be  hoped  that  the  Commission  will  make  public  all  the  informa- 
tion it  secures  that  bears  on  the  trust  question.  The  trusts 
can  no  longer  plead  the  sacro-sanct  character  of  their  business; 

1  Section  sis  (c) . 

2  Section  sLx  (h) .  Acting  under  the  authority  granted  by  this  section 
the  Commission  undertook  and  has  completed  (1916)  an  investigation  of 
Cooperation  in  American  Export  Trade. 

'  Section  six  (f). 


350        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

this  business  has  reached  such  dimensions  as  to  cause  them  to  be 
imbued  wath  a  pubHc  interest.  If  they  are  not  pubHc  service 
corporations,  as  that  phrase  is  technically  used,  neither  are  they 
private  institutions.  The  annual  reports  to  Congress  making 
recommendations  for  additional  legislation  will  undoubtedly 
influence  the  future  course  of  trust  legislation,  just  as  the  recom- 
mendations of  the  Interstate  Commerce  Commission  have  in- 
fluenced the  trend  of  railway  legislation.  No  doubt  the  experi- 
ence of  the  Interstate  Commerce  Commission  with  the  railways 
made  Congress  surer  of  its  ground  in  the  creation  of  a  Trade 
Commission,  yet  that  experience  afforded  no  complete  parallel. 
The  Trade  Commission  deals  with  a  much  larger  number  of 
corporations,  pursuing  diverse  businesses;  and  it  is  established 
to  restore  and  preserve  competitive  conditions  rather  than  to 
fix  the  charges  for  service  performed  by  corporations  that  are 
generally  recognized  as  natural  monopolies.  Under  these  cir- 
cumstances it  is  undoubtedly  better  that  the  country  should 
proceed  surely,  even  if  it  seems  to  be  proceeding  slowly;  for  if 
progress  is  sure,  the  goal  is  likely  to  be  sooner  attained. 

II.  In  addition  to  its  powers  of  investigation,  the  Commis- 
sion has  power  over  unfair  methods  of  competition.^  Section  five 
declares  that  "unfair  methods  of  competition  in  commerce  are 
hereby  declared  unlawful."  "  The  Commission  is  then  directed 
to  prevent  persons,  partnerships,  or  corporations  (except  banks, 
and  common  carriers  subject  to  the  acts  to  regulate  commerce) 
from  using  unfair  methods  of  competition  in  commerce.  The 
remaining  provisions  of  this  section,  dealing  largely  with  pro- 
cedure, may  be  enumerated  seriatim,  (i)  If  the  Commission 
has  reason  to  believe  that  any  person,  partnership,  or  corpora- 
tion (save  those  excepted  above)  has  been  or  is  using  any  unfair 
method  of  competition  in  commerce,  and  if  it  shall  appear  to 
the  Commission  that  a  proceeding  by  it  would  be  in  the  interest 
of  the  public,  it  shall  serve  upon  such  person,  firm,  or  corpora- 
tion a  complaint  stating  its  charges,  and  containing  a  notice  of  a 

'  For  a  definition  of  commerce  as  used  in  the  act  see  p.  344. 
-  On  the  subject  of  unfair  competition,  see  the  report  of  the  Bureau  of 
Corporations  on  Trust  Laws  and  Unfair  Competition. 


THE  TRUST  LEGISLATION  OF  1914  351 

hearing  to  be  held  at  least  thirty  days  after  the  service  of  the 
complaint.     (2)  The  party  complained  of  shall  have  the  right 
to  appear  at  the  time  fixed  and  show  cause  why  an  order  should 
not  be  entered  requiring  it  to  desist  from  the  violation  of  the  law 
as  charged  in  the  complaint.    (3)  Other  parties  may  be  allowed 
by  the  Commission  to  intervene  and  appear  in  the  proceedings 
by  counsel  or  in  person.    (4)  If  upon  such  hearing  the  Commis- 
sion shall  be  of  the  opinion  that  the  method  of  competition  in 
question  is  prohibited  by  the  act,  it  shall  make  a  written  report 
in  which  it  shall  state  its  findings  as  to  the  facts,  and  it  shall 
order  such  corporation  to  desist  from  using  such  method  of  com- 
petition.    (5)  If  the  order  is  not  obeyed,  the  Commission  may 
apply  to  the  circuit  court  of  appeals  of  the  United  States,  within 
any  circuit  where  the  method  of  competition  in  question  was 
used  or  where  such  corporation  carries  on  business,  for  the  en- 
forcement of  its  order.     (6)  Upon  the  filing  of  the  application 
and  of  the  transcript  of  record,  the  court  shall  have  jurisdiction 
of  the  proceeding,  and  shall  have  power  to  make  an  order  affirm- 
ing, modifying,  or  setting  aside  the  order  of  the  Commission. 
(7)  The  findings  of  the  Commission  as  to  the  facts,  if  supported 
by  testimony,  shall  be  conclusive.    (8)  If  either  party  shall  apply 
to  the  court  for  leave  to  adduce  additional  evidence,  and  shall 
show  to  the  satisfaction  of  the  court  that  such  additional  evi- 
dence is  material  and  that  there  were  reasonable  grounds  for 
the  failure  to  adduce  such  evidence  in  the  proceeding  before 
the  Commission,  the  court  may  order  such  additional  evidence 
to  be  taken  before  the  Commission.    (9)  By  reason  of  the  addi- 
tional evidence,  the  Commission  may  modify  its  findings  as 
to  the  facts,  or  make  new  findings,  which  findings,  if  supported 
by  testimony,  shall  be  conclusive;  and  the  Commission  shall 
file  its  findings  and  its  recommendation,  if  any,  for  the  modifi- 
cation or  setting  aside  of  its  original  order.    (10)  The  judgment 
and  decree  of  the  court  shall  be  final,  except  that  an  appeal 
may  be  taken  to  the  Supreme  Court  upon  certiorari  as  provided 
in  section  two  hundred  and  forty  of  the  Judicial  Code.     (11) 
Any  party  required  by  an  order  of  the  Commission  to  desist 
from  using  an  unfair  method  of  competition  may  obtain  a  re- 


352       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

view  of  this  order  in  the  aforesaid  circuit  court  of  appeals  by 
fiUng  a  written  petition  asking  that  the  order  of  the  Commission 
be  set  aside.  (By  this  provision  the  party  complained  of  need 
not  wait  for  the  Commission  to  act;  it  can  proceed  upon  its 
own  account  to  test  the  validity  of  the  Commission's  order.) 
(12)  The  Commission  upon  being  served  with  a  copy  of  this 
petition  shall  file  in  the  court  a  transcript  of  the  record  as  above 
provided.  (13)  Upon  the  filing  of  the  transcript  the  court  shall 
have  the  same  jurisdiction  of  the  proceeding  as  in  the  event  of  an 
application  by  the  Commission  for  the  enforcement  of  its  order. 
(14)  The  jurisdiction  of  the  circuit  court  of  appeals  of  the  United 
States  to  enforce,  set  aside,  or  modify  orders  of  the  Commission 
shall  be  exclusive.  (This  is  true  whether  the  initiative  in  bring- 
ing the  order  of  the  Commission  into  court  be  taken  by  the 
Commission  or  by  the  party  complained  of.)  (15)  The  pro- 
ceedings in  the  circuit  court  of  appeals  shall  be  given  precedence 
over  all  other  cases  pending  therein,  and  shall  be  in  every  way 
expedited.  (16)  No  order  of  the  Commission  or  judgment  of 
the  Court  to  enforce  the  same  shall  in  any  wise  relieve  or  absolve 
any  person,  partnership,  or  corporation  from  any  liability  under 
the  anti-trust  acts. 

The  Senate  bill  had  declared  unlawful  "  unfair  competition." 
The  objection  had  been  raised  in  the  course  of  the  debate  in  the 
Senate  that  the  term  was  too  vague;  that  business  men  would 
not  know  what  in  law  was  ' '  fair ' '  and  what  was  ' '  unfair. ' '  Even 
Representative  Covington  stated  that  when  the  proposition  to 
prohibit  "unfair  competition"  was  first  mooted  in  the  House  he 
believed  that  the  phrase  was  too  vague  to  be  enforced.^  But 
further  reflection  and  study  convinced  him  as  well  as  most  of  the 
other  doubters  that  the  phrase  had  a  definite  significance  in  the 
decisions  of  the  courts;''  and  the  bijl  passed  the  Senate  in  this 
form.  In  the  conference  committee  there  was  substituted  for 
"unfair  competition"  the  words  "unfair  methods  of  competi- 
tion." This  change  was  made  upon  the  insistence  of  the  House 
conferees.     Senator  Cummins,  who  had  introduced  the  unfair 

^  Cong.  Record,  September  10,  1914,  p.  14928. 

2  On  unfair  competition,  iee  Nims,  Unfair  Business  Comi)etition. 


THE  TRUST  LEGISLATION  OF  1914  353 

competition  section  in  the  Senate,  in  discussing  the  action  of  the 
conference  committee,  said  that  the  two  terms  in  his  judgment 
meant  exactly  the  same  thing,  though  he  regretted  the  change, 
since  the  term  "unfair  competition"  was,  in  his  opinion,  better 
understood  at  law  than  the  term  "unfair  methods  of  competi- 
tion." Representative  Covington,  chairman  of  the  House  con- 
ferees, in  explaining  the  conference  report,  cited  numerous  cases 
to  show  that  there  was  a  well-defined  class  of  declarations  by 
the  courts  defining  "unfair  methods  of  competition," — many 
more  than  there  were  in  1890  to  indicate  the  meaning  of  the 
words  "contracts  in  restraint  of  trade,"  as  found  in  the  Sherman 
Act.  But  to  meet  the  objection  that  the  meaning  of  the  law  was 
uncertain  it  was  provided  that  no  penalties  should  lie  against  the 
initial  violation  of  this  prohibition;  penalties  were  to  operate 
only  after  the  order  of  the  Commission  to  desist  from  the  use  of 
any  particular  unfair  competitive  device  had  been  affirmed  by 
the  courts.  In  order  that  meanwhile  the  use  of  unfair  competi- 
tive methods  might  not  prove  disastrous  to  the  complainant, 
provision  was  made  for  the  expeditious  determination  of  the 
matter  by  the  courts. 

The  Senate  bill  had  required  the  Commission  to  act  whenever 
it  had  reason  to  believe  that  any  person  or  concern  was  resorting 
to  unfair  competition.  The  conference  committee  added  a 
proviso  that  the  Commission  should  act,  "if  it  shall  appear  to  the 
commission  that  a  proceeding  by  it  in  respect  thereof  would  be 
to  the  interest  of  the  public."  As  Representative  Clayton 
pointed  out  in  explaining  the  conference  report,  this  proviso  was 
inserted  to  prevent  the  Commission  from  becoming  a  clearing 
house  for  the  settlement  of  everyday  quarrels  of  competitors  in 
matters  which  were  free  from  detriment  to  the  public,  and  which 
ought  to  be  settled  through  the  courts.^  To  compel  the  Commis- 
sion to  take  up  every  instance  of  an  "unfair  method  of  competi- 
tion" would  hamper  it  in  effecting  a  speedy  redress  of  those 
particular  unfair  competitive  methods  which  tended  to  bring 
about  monopoly,  and  which,  were  they  not  straightway  enjoined, 
might  mean  ruin  to  the  independent  manufacturers.  Unless 
1  Cong.  Record,  September  10,  1914,  p.  14930. 


354        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

we  are  to  have  confidence  in  the  good  faith  of  the  Commission 
in  determining  when  the  pubhc  interest  is  concerned,  it  had 
been  better  never  to  have  estabhshed  such  a  body.  It  is  particu- 
larly important,  however,  that  the  Commission  act  in  good  faith, 
since  the  initiative  in  preventing  unfair  competition  under  this 
act  can  be  taken  only  by  it;  the  Department  of  Justice  can  not 
institute  a  suit  to  restrain  unfair  methods  of  competition;  nor 
can  the  Court  entertain  such  a  suit. 

An  important  change  was  also  made  in  conference  in  the 
nature  of  the  court  review  of  the  Commission's  orders.  The 
Senate  bill  had  provided  that  the  Commission  might  bring  a 
suit  for  the  enforcement  of  its  orders  in  the  district  court  of  the 
appropriate  district  (the  party  against  whom  the  order  had  been 
given  might  do  the  same).  In  order  to  avoid  the  delay  of  the 
lower  courts,  it  was  provided  in  conference  that  the  circuit  court 
of  appeals  should  have  initial  jurisdiction  of  cases  relating  to  the 
Orders  of  the  Commission,  and  that  the  circuit  court  should 
expedite  the  cases  in  every  way  possible.  The  controversy  in 
the  Senate  between  the  advocates  of  a  "broad  review"  of  the 
Commission's  orders  and  a  "  narrow  review  "  resulted  in  a  victory 
for  the  former.  The  advocates  of  a  "broad  review"  contended 
that  the  Trade  Commission  Act  would  be  unconstitutional  unless 
it  provided  for  a  broad  review  of  the  Commission's  orders  by  the 
courts.  A  narrow  review  of  the  orders  of  the  Interstate  Com- 
merce Commission  had  been  held  to  be  constitutional,  it  was 
true;  but  this  commission  exercised  legislative  power — the  power 
to  prescribe  the  rates  to  be  charged  in  the  future — and  the  courts 
can  not  interfere  with  constitutional  exercise  of  legislative  power. 
But  the  Federal  Trade  Commission  was  to  have  no  legislative 
power;  it  was  to  have  no  power  to  prescribe  fair  methods  of 
competition.  It  was  to  possess  merely  the  judicial  power  to  order 
the  discontinuance  of  an  unfair  method  of  competition;  and 
under  the  Constitution  the  power  to  act  finally  in  a  judicial 
capacity  can  be  exercised  only  by  a  court.  The  conclusion  of 
the  Commission  as  to  the  facts  was  conclusive,  but  its  decision 
that  the  facts  found  constituted  a  violation  of  the  law  had  in  the 
nature  of  the  case  to  be  reviewed  by  the  court.    Not  until  the 


THE  TRUST  LEGISLATION  OF  1914  355 

order  of  the  Commission  was  sustained  did  any  penalties  lie;  and 
even  if  the  Commission  was  sustained,  there  were  no  penalties 
unless  the  order  of  the  court  was  disobeyed.  In  that  event  the 
penalty  would  be  imposed  for  contempt  of  court. 

The  "unfair  competition"  provisions  of  the  Trade  Commission 
Act  should  prove  very  important.  The  study  of  individual 
trusts  made  earUer  in  this  book  has  made  it  clear  that  unfair 
competitive  methods  have  proved  a  powerful  weapon  in  the 
hands  of  the  trusts  to  destroy  competing  enterprises  and  to 
discourage  potential  competitors.  In  so  far  as  the  trusts  main- 
tain their  position  by  the  use  of  such  tactics,  the  determined 
exercise  by  the  Commission  of  its  powers  in  this  respect  will  go 
far  toward  "solving"  the  trust  problem.^  But  while  this  was 
probably  the  purpose  of  the  law,  its  incidental  effects  should 
prove  much  greater.  The  law  is  not  limited  in  its  application  to 
trusts  or  combinations;  it  applies  to  all  corporations  subject  to 
the  jurisdiction  of  the  Commission.  And  perhaps  as  important, 
there  is  legislative  approval  of  the  view  that  ethical  principles 
can  be  applied  to  business  relationships,  that  "shrewd"  tricks 
are  not  to  be  justified  on  the  ground  that  "business  is  business." 
The  commercial  world  by  the  acceptance  of  these  principles 
would  make  an  important  stride  toward  raising  the  plane  of 
business  competition,  and  toward  a  marked  reduction  in  the 
"ruinous"  character  of  competition. 

Miscellaneous  Provisions 

Certain  miscellaneous  provisions  may  be  noted.  It  is  provided 
that  the  Commission  or  its  agents  shall  at  all  reasonable  times 
have  access  to  the  documentary  evidence  of  any  corporation 
being  investigated  or  proceeded  against,  with  the  right  to  copy 
such  documentary  evidence.^    The  penalty  for  refusal  on  the 

^  For  a  copy  of  the  decisions  of  the  Commission  dealing  with  unfair  meth- 
ods of  competition,  see  Federal  Trade  Commission  Decisions,  vol.  I  (covering 
the  period  from  March  16,  1915,  to  June  30,  1919).  For  an  enumeration  of 
the  methods  condemned  by  the  Commission,  see  Annual  Report  of  the 
Federal  Trade  Commission,  1920,  p.  56, 

2  Section  nine, 


356        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

part  of  a  corporation  is  fine  or  imprisonment,  or  both.^  The 
Commission  is  given  power  to  require  by  subpoena  the  attend- 
ance and  testimony  of  witnesses,  and  the  production  of  all  docu- 
mentary evidence  relating  to  the  matter  under  investigation.^ 
In  case  of  disobedience  to  its  subpoena  the  Commission  may 
invoke  the  aid  of  any  court  of  the  United  States.  Failure  to  obey 
the  order  of  the  court  may  be  punished  by  the  court  as  a  con- 
tempt thereof.  In  another  section  it  is  provided  that  any  person 
who  neglects  or  refuses  to  attend  and  testify,  or  to  answer  any 
lawful  inquiry,  or  to  produce  documentary  evidence  in  obedi- 
ence to  the  subpcena  or  lawful  requirement  of  the  Commission, 
shall  be  guilty  of  an  offense,  and  upon  conviction  thereof  by  a 
court  shall  be  subject  to  a  fine  of  $i,ooo  to  $5,000,  or  imprison- 
ment for  not  more  than  one  year,  or  to  both  fine  and  imprison- 
ment.^ No  person  may  be  excused  from  testifying  or  from  pro- 
ducing documentary  evidence  on  the  ground  that  the  testimony 
or  evidence  may  tend  to  criminate  him,  but  no  natural  person 
shall  be  prosecuted  on  account  of  any  matter  concerning  which 
he  may  testify  or  produce  evidence  before  the  Commission  in 
obedience  to  its  subpoena."*  To  prevent  any  misuse  by  the 
employees  of  the  Commission  of  the  information  obtained  by 
them  in  the  exercise  of  their  duties  and  powers,  it  is  provided  that 
any  officer  or  employee  of  the  Commission  who  shall  without 
authority  make  public  any  information  obtained  by  the  Com- 
mission, unless  directed  by  a  court,  shall  be  deemed  guilty  of  a 
misdemeanor,  and  be  subject  to  fine  or  imprisonment,  or  both.'' 
In  section  eight  it  is  provided  that  the  several  departments  and 
bureaus  of  the  government  shall,  when  directed  by  the  Presi- 
dent, furnish  the  Commission,  upon  its  request,  all  records, 
papers,  and  information  in  their  possession  relating  to  any  cor- 
poration subject  to  the  provisions  of  the  act,  and  shall  detail 
from  time  to  time  such  officials  and  employees  as  the  President 
may  direct;  and  in  the  last  section  (section  11)  it  is  stated  that 
nothing  contained  in  this  act  shall  be  construed  to  interfere  with 
the  enforcement  of  the  provisions  of  the  anti-trust  acts  or  the 

'  Section  ten.  ^  Section  ten.  ^  Section  nine. 

?  Section  nine.  ^  Sectiop  ten. 


THE  TRUST  LEGISLATION  OF  1914  357 

acts  to  regulate  commerce,  nor  construed  to  alter,  modify,  or 
repeal  these  acts  or  any  part  thereof. 

THE  CLAYTON  ACT 

The  Trade  Commission  Act  is  a  unified  measure;  it  creates  a 
trade  commission,  and  outlines  its  powers  and  duties.  The 
Clayton  Act,  on  the  other  hand,  deals  with  a  wide  range  of 
matters,  a  number  of  which  hardly  belong  in  an  anti-trust 
measure.  Its  leading  provisions  may  be  summarized  under 
three  headings:  first,  a  set  of  positive  prohibitions  dealing  with 
local  price  discrimination,  tying  contracts,  holding  companies, 
and  interlocking  directorates;  second,  remedies;  and  third,  labor 
provisions.  Sections  nine  and  ten,  dealing  with  misconduct  on 
the  part  of  common  carriers,  it  is  not  proposed  to  discuss. 

Positive  Prohibitions 

After  defining  in  section  one  the  terms  anti-trust  laws,^  com- 
merce,- and  persons,^  the  act  proceeds  in  sections  two,  three, 
seven,  and  eight,  respectively,  to  prohibit,  with  certain  qualifi- 
cations, (i)  local  price  discrimination,  (2)  tying  contracts, 
(3)  holding  companies,  and  (4)  interlocking  directorates.  The 
purpose  of  these  sections,  according  to  the  Senate  Committee  on 
the  Judiciary,  was  to  "make  unlawful  certain  trade  practices 
which,  as  a  rule,  singly  and  in  themselves,  are  not  covered  by 
the  act  of  July  2,  1S90,  or  other  existing  antitrust  acts,  and  thus, 
by  making  these  practices  illegal,  to  arrest  the  creation  of  trusts, 
conspiracies,  and  monopolies  in  their  incipiency  and  before 
consummation."  "* 

1  Anti-trust  laws  include,  as  in  the  Trade  Commission  Act,  the  Sherman 
Act,  sections  73-77  of  the  Wilson  Tariff  Act  of  1894,  and  an  Act  of  Feb- 
ruary 12, 1913,  amending  sections  73-77  of  the  Wilson  Act ;  but  in  addition  it 
includes  the  Clayton  Act  itself. 

^  Commerce  is  defined  more  broadly  than  in  the  Trade  Commission  Act. 
It  includes  insular  possessions  or  other  places  under  the  jurisdiction  of  the 
United  States.  The  Philippine  Islands,  however,  are  excluded.  The  reasons 
for  the  exclusion  of  the  Islands  are  given  in  Senate  Report  no.  698,  63rd 
Cong.,  2nd  Sess. 

^  The  word  persons  includes  corporations  and  associations. 

*  Senate  Report  no.  698,  63rd  Cong.,  2nd  Sess. 


358       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

(i)  Local  price  discrimination.  The  detailed  study  of  trusts 
made  in  the  earlier  part  of  this  book  has  shown  the  pressing  need 
for  federal  legislation  dealing  with  local  price  discrimination.  At 
the  time  of  the  passage  of  this  clause  at  least  nineteen  separate 
states  had  laws  prohibiting  this  form  of  discrimination.^  But 
state  legislation  is  not  effective  for  this  purpose,  since  it 
does  not  prevent  a  trust,  doing  a  nation-wide  business, 
from  making  its  prices  uniformly  low  in  a  given  state  in 
order  to  eliminate  competition  in  that  state,  meanwhile  re- 
couping itself  for  the  loss  thus  sustained  by  charging  high 
prices  in  the  other  states.  Section  two  of  the  act  declares 
''that  it  shall  be  unlawful  for  any  person  engaged  in  commerce, 
in  the  course  of  such  commerce,  either  directly  or  indirectly 
to  discriminate  in  price  between  different  purchasers  of  commo- 
dities, which  commodities  are  sold  for  use,  consumption,  or  resale 
within  the  United  States  or  any  Territory  thereof  or  the  District 
of  Columl)ia  or  any  insular  possession  or  other  place  under  the 
jurisdiction  of  the  United  States,  where  the  effect  of  such  dis- 
crimination may  be  to  substantially  lessen  competition  or  tend  to 
create  a  monopoly  in  any  line  of  commerce:  Provided,  That 
nothing  herein  contained  shall  prevent  discrimination  in  price 
between  purchasers  of  commodities  on  account  of  differences  in 
the  grade,  quality,  or  quantity  of  the  commodity  sold,  or  that 
makes  only  due  allowance  for  difference  in  the  cost  of  selling  or 
transportation,  or  discrimination  in  price  in  the  same  or  different 
communities  made  in  good  faith  to  meet  competition:  And 
provided  further,  That  nothing  herein  contained  shall  prevent 
persons  engaged  in  selling  goods,  wares,  or  merchandise  in  com- 
merce from  selecting  their  own  customers  in  bona  fide  transac- 
tions and  not  in  restraint  of  trade." 

The  House  bill  had  declared  that  any  person  engaged  in  com- 
merce who  discriminated  in  price  between  different  purchasers, 
"with  the  purpose  or  intent  thereby  to  destroy  or  wrongfully 
injure  the  business  of  a  competitor,"  should  be  deemed  guilty  of 
a  misdemeanor  and  subject  to  penalty,  either  fine  or  imprison- 
ment, or  both.  The  Senate  Committee  on  the  Judiciary  was  of 
1  House  Report  no.  627, 63rd  Cong.,  2nd  Sess. 


THE  TRUST  LEGISLATION  OF  1914  359 

the  opinion,  in  view  of  the  experimental  character  of  this  legisla- 
tion, that  it  would  not  be  wise  to  apply  the  harshness  of  the 
criminal  law;  and  it  therefore  struck  out  the  penalty,  and  put  the 
enforcement  of  this  section  in  the  hands  of  the  Trade  Commis- 
sion.^ Some  two  weeks  later,  however,  the  Trade  Commission 
Act,  conferring  upon  the  Commission  power  to  deal  with  unfair 
competition,  passed  the  Senate.  As  the  result  of  this  action, 
the  Committee  on  the  Judiciary  recommended  that  the  price 
discrimination  section  of  the  Clayton  bill  (section  2)  be  struck 
out;  and  this  motion  was  agreed  to  by  the  Senate.-  When  the 
bill  went  to  conference  the  House  conferees  objected  to  the 
elimination  of  section  two,  and  for  several  weeks  difficulty  was 
experienced  in  reaching  an  agreement.  A  compromise,  how- 
ever, was  finally  arrived  at.  The  section  was  to  be  restored,  but 
its  enforcement  was  to  rest  with  the  Commission,  and  the  crimi- 
nal penalties  provided  in  the  House  bill  were  to  be  eliminated. 
The  conference  committee  also  accepted  the  amendment  of  the 
Senate  Committee  on  the  Judiciary  that  from  the  prohibitions  of 
this  section  there  should  be  excepted  price  discrimination  due  to 
differences  in  the  cost  of  selling,  and  price  discrimination  made  in 
good  faith  to  meet  competition.  For  the  House  provision  that 
discrimination  in  price  "with  the  purpose  or  intent  thereby  to 
destroy  or  wrongfully  injure  the  business  of  a  competitor"  was 
prohibited,  the  conference  committee  substituted  a  prohibition  of 
price  discrimination  "where  the  effect  of  such  discrimination 
may  be  to  substantially  lessen  competition  or  tend  to  create  a 
monopoly  in  any  line  of  commerce,"  The  report  of  the  confer- 
ence committee,  as  has  already  been  pointed  out,  was  approved 
by  both  houses  without  change. 

The  local  price  discrimination  section  has  been  the  subject  of 
much  criticism.  In  particular,  objection  has  been  made  to  the 
elimination  of  the  penalties.  As  the  act  now  reads,  if  a  trust 
resorts  to  local  price  cutting  which  endangers  the  hfe  of  com- 
petitors, the  Commission  may  enter  an  order  requiring  the  trust 
to  desist.    But,  it  is  said,  by  the  time  the  order  of  the  Commis- 

1  Senate  Report  no.  698,  63rd  Cong.,  2nd  Sess. 

2  Cong.  Record,  August  17,  1914,  p.  13849. 


360       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

sion  has  been  sustained  by  the  courts,  the  independent  concern 
may  have  been  compelled  to  abandon  the  unequal  struggle. 
While  the  competitor  may  still  sue  for  and  possibly  collect 
damages,  nevertheless  the  competition  which  the  act  was  passed 
to  preserve  would  meanwhile  have  been  eliminated.  Vigorous 
objection  has  also  been  made  to  the  numerous  provisos  of  the 
section.^  A  discrimination  "made  in  good  faith  to  meet  com- 
petition" may  seriously  interfere  with  the  effectiveness  of  the 
prohibition.  Can  a  trust  reduce  prices  in  a  given  locality  be- 
cause an  efficient  independent  concern  reduces  prices?  Un- 
doubtedly it  can,  for  otherwise  the  trust  would  be  unfairly 
hampered  in  competition  for  business.  But  may  the  trust  in 
dealing  with  this  competition  merely  meet  the  price  of  its  com- 
petitor, or  may  it  reduce  prices  still  further  on  its  own  account, 
reduce  them  perhaps  even  below  cost?  The  law  appears  to  place 
no  limitation  on  the  amount  of  the  discrimination  when  competi- 
tion is  met,  unless  that  is  implied  in  the  words  "good  faith." 
May  not  the  fear  of  such  destructive  action  on  the  part  of  the 
trust  prevent  the  independent  concerns  from  initiating  any  price 
reductions,  and  thus  insure  the  maintenance  of  monopoly  prices? 
Moreover,  what  discriminations  may  not  be  covered  up  on  the 
ground  of  differences  in  grade  or  quality?  Again,  what  does  a 
"substantial"  lessening  of  competition  mean?  And  may  not  a 
trust  forbidden  to  discriminate  in  prices  effect  the  same  end  by 
means  of  a  discrimination  in  the  manner  and  terms  of  delivery, 
or  by  means  of  more  lenient  terms  of  credit?  The  objection  has 
been  made  that  section  two  is  surplusage,  since  local  price 
discrimination  is  but  a  form  of  the  unfair  competition  forbidden 
in  the  Trade  Commission  Act.  This,  if  true,  is  a  minor  objection ; 
the  important  question  is,  has  the  prohibition  of  unfair  compe- 
tition in  general  been  weakened  by  the  specific  prohibition  of 
price  discrimination  subject  to  numerous  and  perhaps  vital 
exceptions?  Upon  these  points  we  must  await  the  decision  of 
the  courts. 

(2)  Tying  contracts.   The  manner  in  which  "  tying  "  contracts 

'  Section  two  does  not  forbid  the  practice  of  dumping,  that  is,  the  sale  of 
commodities  abroad  at  lower  prices  than  at  home. 


THE  TRUST  LEGISLATION  OF  1914  361 

promote  monopoly  has  been  described  in  chapter  VIII;  and  the 

weakness  of  state  legislation  in  dealing  with  this  evil  in  the  case 
of  the  United  Shoe  Machinery  Company  has  also  been  shown. 
The  decision  of  the  Supreme  Court  in  the  Dick  case  (191 2)  made 
federal  legislation  imperative.^  Section  three  of  the  act  declares 
"that  it  shall  be  unlawful  for  any  person  engaged  in  commerce, 
in  the  course  of  such  commerce,  to  lease  or  make  a  sale  or  con- 
tract for  sale  of  goods,  wares,  merchandise,  machinery,  supplies 
or  other  commodities,  whether  patented  or  unpatented,  for  use, 
consumption  or  resale  within  the  United  States  or  any  Territory 
thereof  or  the  District  of  Columbia  or  any  insular  possession  or 
other  place  under  the  jurisdiction  of  the  United  States,  or  fix  a 
price  charged  therefor,  or  discount  from,  or  rebate  upon,  such 
price,  on  the  condition,  agreement  or  understanding  that  the 
lessee  or  purchaser  thereof  shall  not  use  or  deal  in  the  goods, 
wares,  merchandise,  machinery,  supplies  or  other  commodities 
of  a  competitor  or  competitors  of  the  lessor  or  seller,  where  the 
effect  of  such  lease,  sale,  or  contract  for  sale  or  such  condition, 
agreement  or  understanding  may  be  to  substantially  lessen 
competition  or  tend  to  create  a  monopoly  in  any  line  of  com- 
merce. " 

This  clause  was  in  substantially  this  form  in  the  bill  as  it 
passed  the  House.  The  Senate  Committee  on  the  Judiciary — • 
to  which  the  House  bill  was  referred — made  three  important 
changes.  It  eliminated  the  penalties,  and  put  the  enforcement 
of  the  section  in  the  hands  of  the  Trade  Commission.  It  made 
the  prohibitions  applicable  to  "contracts  for  sale"  as  well  as 
to  "  sales."  And  it  made  the  prohibitions  applicable  to  commodi- 
ties, etc.,  whether  patented  or  unpatented.  All  these  amend- 
ments were  accepted  in  conference,  and  became  part  of  the 
law.  The  Senate,  however,  did  not  accept  the  clause  in  the 
form  recommended  by  its  committee.  Its  first  act  was  to  strike 
out  this  section  of  the  bill  entirely,-  for  the  same  reason  that  it 
struck  out  the  price  discrimination  section.  But  this  action 
was  clearly  unwise.  The  tying  contract  when  used  in  connec- 
tion with  patented  articles  would  hardly  come  within  the  "un- 

^  Cf.  p.  419.  2  Cong.  Record,  August  17,  1914,  p.  13849. 


362       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

fair  methods  of  competition"  prohibited  in  section  five  of  the 
Trade  Commission  Act,  since  the  Supreme  Court  in  the  Dick 
case  had  upheld  a  contract  of  this  nature  as  being  within  the 
rights  of  the  patentee  under  the  law  as  it  then  stood.  The  Sen- 
ate therefore  reconsidered  its  action,  and  adopted  as  a  substitute 
for  the  House  section  a  clause  prohibiting  with  criminal  penal- 
ties tying  contracts  in  connection  with  patented  articles.^  This 
amendment,  according  to  Representative  Webb,  one  of  the 
conferees,  was  evidently  aimed  at  the  United  Shoe  Machinery 
Company.^ 

The  conference  committee,  after  a  long  discussion,  decided 
to  accept  the  House  bill  as  amended  by  the  Senate  Committee 
on  the  Judiciary,  with  one  important  change.  This  was  to  limit 
the  prohibitions  of  the  section  to  those  cases  where  "the  effect 
of  such  lease,  sale,  or  contract  for  sale  or  such  condition,  agree- 
ment or  understanding  may  be  to  substantially  lessen  compe- 
tition or  tend  to  create  a  monopoly  in  any  line  of  commerce." 
This  addition  was  severely  criticized.  It  was  claimed  that  the 
term  "substantial"  was  broader  than  the  word  "unreasonable" 
read  into  the  Sherman  Act  by  the  Supreme  Court;  and  that  it 
would  be  difficult  to  show  that  competition  was  "substantially 
lessened."  On  the  other  hand,  the  section  without  this  qualify- 
ing phrase  would  have  prohibited  many  unobjectionable  rela- 
tionships. Manufacturers  frequently  sell  their  goods  to  dealers 
on  the  condition  that  these  dealers  will  handle  their  goods  only, 
— a  method  of  disposing  of  their  goods  not  essentially  different 
from  the  establishment  by  the  manufacturer  of  agencies  for  the 
sale  of  goods  on  a  salary  or  commission  basis.  If  there  are  a 
number  of  dealers  in  a  town  this  is  an  effective  way— and  from 
the  viewpoint  of  public  welfare  not  an  objectionable  way — of 
distributing  the  product.  But  if  there  are  only  a  few  dealers — 
or  perhaps  only  one — then  this  practice  would  become  objec- 
tionable; and  it  would  be  prohibited  as  substantially  lessening 
competition.  It  was  the  contracts,  leases,  etc.,  that  tend  to 
create  or  maintain  monopoly  that  Congress  meant  to  prohibit; 

'  Cong.  Record,  August  26,  1914,  p.  14276. 
2  Ibid.,  October  7,  1914,  p.  16273. 


THE  TRUST  LEGISLATION  OF  1914  363 

and  these  would  seem  to  be  prohibited  by  the  clause  as  it  now 
stands. 

(3)  Holding  companies.  The  trust  movement,  as  has  been 
shown  in  chapter  IV,  was  in  large  measure  a  holding  company 
movement,  and  it  was  therefore  to  be  expected  that  the  trust 
legislation  would  deal  with  holding  companies.  Moreover,  Presi- 
dent Wilson  in  his  message  to  Congress  had  urged  their  prohibi- 
tion. Section  seven  of  the  act  provides  "that  no  corporation 
engaged  in  commerce  shall  acquire,  directly  or  indirectly,  the 
whole  or  any  part  of  the  stock  or  other  share  capital  of  another 
corporation  engaged  also  in  commerce,  where  the  effect  of  such 
acquisition  may  be  to  substantially  lessen  competition  between 
the  corporation  whose  stock  is  so  acquired  and  the  corporation 
making  the  acquisition,  or  to  restrain  such  commerce  in  any 
section  or  community,  or  tend  to  create  a  monopoly  of  any  line 
of  commerce."  The  second  paragraph  of  this  same  section  (§  7) 
contains  a  prohibition  in  almost  identical  language  against  any 
corporation  (whether  engaged  in  commerce  or  not)  acquiring  the 
stock  of  two  or  more  corporations  engaged  in  commerce,  where 
the  effect  of  such  acquisition,  or  the  use  of  such  stock  by  the 
voting  of  proxies  or  otherwise,  may  be  to  substantially  lessen 
competition,  etc.  This  deals  of  course  with  the  pure  holding 
company,  not  itself  engaged  in  commerce. 

These  prohibitions,  which  included  common  carriers,  do  not, 
however,  apply  unfailingly.  They  do  not  apply  to  corpora- 
tions purchasing  such  stock  solely  for  investment,  and  not  using 
the  stock  to  bring  about  the  substantial  lessening  of  competition. 
They  do  not  prevent  corporations  engaged  in  commerce  from 
causing  the  formation  of  subsidiary  corporations  for  the  actual 
carrying  on  of  their  immediate  lawful  business,  when  the  effect 
of  such  formation  is  not  "to  substantially  lessen  competition." 
They  do  not  prevent  common  carriers  from  constructing  or 
acquiring  branch  railroads,  or  extending  their  lines  through  the 
acquisition  of  stock  in  other  common  carriers,  when  there  is  no 
substantial  competition  between  the  common  carrier  and  the 
concern  acquired  by  it.  And  finally,  and  more  important, 
nothing  contained  in  this  section  shall  be  held  "  to  affect  or 


364       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

impair  any  right  heretofore  legally  acquired."  In  other  words, 
this  section  does  not  make  illegal  those  holding  companies  which 
had  been  organized  in  the  past  for  the  purpose  of  creating 
monopolies.  An  amendment  to  this  section  to  make  these  prohi- 
bitions relate  to  "existing"  holdings  of  stock  was  introduced  by 
Senator  Cummins,  but  defeated  by  a  vote  of  16-37.^  In  order, 
however,  not  to  legalize  the  holding  companies  already  organ- 
ized, it  is  further  provided  "That  nothing  in  this  section  shall  be 
held  or  construed  to  authorize  or  make  lawful  anything  hereto- 
fore prohibited  or  made  illegal  by  the  antitrust  laws,  nor  to 
exempt  any  person  from  the  penal  provisions  thereof  or  the  civil 
remedies  therein  provided."  The  holding  companies  then  in 
existence  were  thus  to  retain  the  status  at  law  which  they  then 
had.  And  that  status  is  one  of  illegality  when  the  result  is  an 
unreasonable  restraint  of  trade  or  the  creation  of  a  monopoly. 

(4)  Interlocking  directorates.  The  necessity  of  some  legisla- 
tion to  regulate  interlocking  control  of  competing  companies 
hardly  need  be  argued.  As  the  House  Committee  said:  "The 
concentration  of  wealth,  money,  and  property  in  the  United 
States  under  the  control  and  in  the  hands  of  a  few  individuals  or 
great  corporations  has  grown  to  such  an  enormous  extent  that 
unless  checked  it  will  ultimately  threaten  the  perpetuity  of  our 
institutions."  ^  Section  eight  of  the  act  provides  that  after  two 
years  no  person  shall  be  at  the  same  time  a  director  in  two  or 
more  corporations  engaged  in  commerce,  other  than  banks  ^  and 
common  carriers,^  any  one  of  which  has  a  capital,  surplus,  and 
undivided  profits  exceeding  $1,000,000,  if  such  cori:)orations  are 
or  have  been  theretofore  competitors,  "  so  that  the  elimination  of 
competition  by  agreement  between  them  would  constitute  a 
violation  of  any  of  the  provisions  of  any  of  the  antitrust  laws." 
But  a  director  whose  election  was  not  prohibited  by  this  act 
might  continue  as  a  director  for  one  year  after  his  election,  even 

'  Cong.  Record,  August  31,  1914,  p.  14476. 
2  House  Report  no.  627,  63rd  Cong.,  2nd  sess. 
^  There  were  separate  provisions  dealing  with  banks. 
■*  It  was  intended  to  deal  with  common  carriers  in  the  bill  regulating  the 
issue  of  securities;  but  this  bill  failed  of  passage. 


THE  TRUST  LEGISLATION  OF  1914  365 

though  meanwhile  there  occurred  such  changes  in  the  affairs  of 
the  corporation  as  would,  were  it  not  for  this  proviso,  affect  his 
eligibility  to  act  as  a  director. 

While  the  courts  in  various  dissolution  decrees  have  enjoined 
the  concerns  into  which  a  trust  has  been  dissolved  from  having 
common  directors,  the  Clayton  Act  makes  illegal  the  interlocking 
of  directors  among  concerns  which  actually  compete,  provided 
that  an  agreement  among  these  concerns  would  be  illegal.  In 
one  respect,  therefore,  it  goes  further  than  the  Sherman  Act  as 
interpreted  by  the  courts,  since  the  illegality  attaches  not  only  to 
a  restraint  on  competition,  but  to  such  relationships  as  might 
lead  to  such  restraint. 

The  Interlocking  Directorates  bill  as  originally  introduced  in 
the  House  was  very  drastic;  it  declared  that  the  presence  of  the 
same  individual  upon  the  board  of  directors  of  any  two  corpora- 
tions engaged  in  interstate  commerce,  which  by  virtue  of  their 
location  and  operation  were  naturally  competitors,  would  con- 
stitute a  combination  in  restraint  of  commerce  subject  to  all 
the  penalties  of  the  Sherman  Act.  But  the  House  softened  this 
provision  materially,  though  it  voted  to  retain  the  criminal 
penalties.  The  Senate,  however,  struck  out  the  criminal  penal- 
ties; and  the  bill  became  law  substantially  as  adopted  by  it. 
While  undoubtedly  the  Administration  bill  was  unnecessarily 
severe,  and  while  the  removal  of  the  penalties  may  have  been 
advisable,  it  is  doubtful  whether  the  law,  in  so  far  as  it  deals  with 
interlocking  control,  is  sufficiently  comprehensive.  In  the  first 
place  it  deals  solely  vaih  interlocking  directorates.  It  does  not 
mention  interlocking  officers  or  employees,  and  yet  by  such 
devices  competition  may  be  quite  effectively  restrained,  not  to 
mention  the  possibilities  of  abuse  of  trust  on  the  part  of  the 
officers  or  employees  holding  positions  in  several  corporations. 
It  is  true  that  the  courts  in  dissolution  decrees  have  enjoined  the 
segregated  companies  from  having  common  officers,  yet  ob- 
viously it  would  be  more  effective  by  legislative  act  to  prohibit 
competing  corporations  to  have  common  officers  (when  the 
elimination  of  competition  by  agreement  between  them  would 
constitute  a  violation  of  the  antitrust  laws),  than  to  secure  a 


366       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

court  injunction  against  this  practice  after  competition  has 
already  been  restrained.  Again,  the  act  does  not  prohibit 
interlocking  control  of  competing  companies  through  stock 
ownership  by  indivaduals.  So  long  as  the  same  individual,  or 
group  of  individuals,  controls  two  potentially  competitive  con- 
cerns, competition  will  be  absent.  The  fact  that  these  indi- 
viduals may  be  prohibited  to  act  as  directors  in  both  concerns 
will  not  prevent  them  from  exercising  control  through  dummy 
directors,  voting  trusts,  or  otherwise.  Neither  Congress  nor 
the  President  seem  to  have  been  willing  to  interfere  with  the 
right  of  an  individual  to  acquire  stock  in  competing  corporations, 
though  the  President  did  raise  the  question  for  the  considera- 
tion of  Congress.  But  our  experience  with  the  oil  and  the 
tobacco  trusts  has  demonstrated  that  no  dissolution  which 
does  not  prevent  the  companies  into  which  the  trust  is  divided 
from  being  owned  by  the  same  group  of  stockholders  is  likely  to 
prove  effective.  Both  Attorney  Generals  McReynolds  and 
Gregory  have  recognized  this  fact,  and  subsequent  dissolution 
suits  may  therefore  prove  more  effective  in  this  respect.  Until 
Congress  also  comes  to  this  point  of  view,  its  prohibitions  will 
fall  short  of  providing  an  adequate  remedy  for  the  evils  with 
which  they  deal  more  or  less  half-heartedly. 

Remedies 

The  remedies  against  the  unlawful  practices  previously 
described  may  be  next  considered.  Four  leading  remedies  are 
provided:  (i)  enforcement  through  the  Federal  Trade  Commis- 
sion (or  Interstate  Commerce  Commission  or  Federal  Reserve 
Board);  (2)  individual  suits  for  three-fold  damages;  (3)  suits 
brought  by  the  United  States  government;  (4)  individual  suits 
for  injunctive  relief. 

(i)  Enforcement  through  a  commission.  The  Clayton 
bill  as  it  passed  the  House  punished  with  criminal  penalties  any 
violation  of  the  sections  dealing  with  local  price  discrimination, 
tying  contracts,  holding  companies,  and  interlocking  directo- 
rates. But  in  the  Senate  section  two  was  eliminated,  and  crimi- 
nal penalties  were  removed  from  sections  seven  and  eight,  the 


THE  TRUST  LEGISLATION  OF  1914  367 

enforcement  of  these  two  sections  being  put  in  the  hands  of  the 
Federal  Trade  Commission  and  the  Interstate  Commerce  Com- 
mission. This  was  done  in  order  to  bring  the  bill  into  harmony 
with  the  Trade  Commission  Act,  which,  as  passed  by  the  Senate, 
gave  the  Trade  Commission  jurisdiction  over  unfair  methods  of 
competition  in  general.  The  removal  of  the  criminal  penalties 
met  with  vigorous  opposition.  It  was  predicted  that  litigation  to 
enforce  the  Commission's  orders  would  be  long  drawn  out,  and  it 
was  pointed  out  that  even  if  the  Commission  should  be  sustained 
by  the  courts  no  }:)enalties  of  any  kind  would  accrue.  But  these 
protests  were  unavailing.  The  conference  committee  accepted 
the  amendment  of  the  Senate,  and  on  its  own  account  removed 
the  criminal  penalty  from  the  Senate  section  dealing  with  tying 
contracts. 

The  special  procedure  for  the  enforcement  of  sections  two, 
three,  seven,  and  eight  of  the  Clayton  Act  is  found  in  section 
eleven.  Authority  to  enforce  these  sections  is  vested  in  the 
Interstate  Commerce  Commission,  when  they  apply  to  common 
carriers;  in  the  Federal  Reserve  Board,  when  they  apply  to  banks 
and  trust  companies;  and  in  the  Federal  Trade  Commission, 
when  they  apply  to  other  corporations.  Instead  of  proceeding  to 
prevent  unfair  methods  of  competition  only  if  a  proceeding 
would  be  in  the  interest  of  the  pubKc,  as  in  section  five  of  the 
Trade  Commission  Act,  these  commissions  or  boards  are  directed 
to  prevent  all  violations  of  these  sections.  In  all  other  respects 
the  procedure  is  identical  with  that  provided  in  the  Trade  Com- 
mission Act  for  the  prevention  of  unfair  methods  of  competition. 

(2)  Individual  suits  for  three-fold  damages.  Section  four  of 
the  act  reenacts  with  a  few  minor  changes  section  seven  of  the 
Sherman  Act.  Any  person  injured  in  his  business  or  property  by 
reason  of  anything  forbidden  in  the  anti-trust  laws  may  bring 
suit  in  any  district  court  of  the  United  States  in  the  district  in 
which  the  defendant  resides  or  has  an  agent, ^  and  recover  three- 
fold damages,  and  the  cost  of  the  suit. 

^The  words  "  or  has  an  agent"  are  not  in  section  seven  of  the  Sherman 
Act.  Their  incorporation  in  the  law  greatly  facilitates  the  bringing  of  suits 
for  damages. 


368       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

This  remedy  has  been  given  additional  effectiveness  through  a 
provision  in  section  five  of  the  act  "  that  a  final  judgment  or  de- 
cree hereafter  rendered  in  any  criminal  prosecution  or  in  any  suit 
or  proceeding  in  equity  brought  by  or  on  behalf  of  the  United 
States  under  the  antitrust  laws  to  the  effect  that  a  defendant  has 
violated  said  laws  shall  be  prima  facie  evidence  against  such 
defendant  in  any  suit  or  proceeding  brought  by  any  other  party 
against  such  defendant  under  said  laws  as  to  all  matters  respect- 
ing which  said  judgment  or  decree  would  be  an  estoppel  as 
between  the  parties  thereto;"  and  through  a  provision  that 
during  the  pendency  of  the  government  suit  the  statute  of  limi- 
tations shall  be  suspended  in  respect  of  private  rights  of  action. 
It  was  provided,  however,  that  this  section  shall  not  apply  to 
consent  judgments  or  decrees  entered  before  any  testimony  had 
been  taken;  nor  to  any  consent  judgments  or  decrees  that  may 
be  rendered  in  criminal  proceedings  or  suits  in  equity,  then 
pending,  in  which  the  taking  of  testimony  had  been  commenced 
but  not  concluded,  provided  such  judgments  or  decrees  were 
rendered  before  any  further  testimony  was  taken. 

Section  five  was  designed  to  facilitate  the  bringing  of  suits, 
particularly  by  persons  of  small  means,  to  recover  damages  for 
injury  sustained  on  account  of  a  violation  of  the  anti-trust  laws. 
It  was  in  keeping  with  the  recommendation  of  the  President, 
who  in  his  annual  message  had  said  that  it  was  not  fair  that  the 
private  litigant  should  be  obliged  to  set  up  and  establish  again 
the  facts  which  the  government  had  already  proved.  The  House 
bill  had  made  the  decree  of  the  court  conclusive  evidence,  but  the 
constitutionality  of  this  phrase  was  attacked,  and  the  conference 
committee  accepted  the  Senate  amendment  making  the  decree  of 
the  court  prima  facie  evidence.  Consent  decrees  were  exempted 
from  a  fear  that  otherwise  concerns  charged  with  violating  the 
law  would  refuse  to  consent  to  a  voluntary  readjustment  of 
their  affairs,  preferring  instead  to  take  their  chances  on  a  favor- 
able court  decision.  The  Senate  bill  had  provided  that  final  de- 
crees "heretofore  rendered,"  as  well  as  those  hereafter  rendered, 
should  be  prima  facie  evidence,  but  this  was  struck  out  in 
the  conference  committee.    The  exclusion  of  these  words  was 


THE  TRUST  LEGISLATION  OF  1914  369 

criticized  in  the  Senate  as  shoeing  special  tenderness  to  the 
Standard  Oil  and  other  trusts,  evidence  against  which  had  been 
secured  by  the  government  with  great  difficulty  and  at  great 
expense. 

(3)  Suits  brought  by  the  United  States  government.  Section 
fifteen  of  the  act  invests  the  district  courts  of  the  United  States 
with  jurisdiction  to  prevent  and  restrain  violations  of  the  act, 
and  makes  it  the  duty  of  the  district  attorneys  of  the  United 
States,  in  their  respective  districts,  under  the  direction  of  the 
Attorney  General,  to  institute  proceedings  to  enforce  the  act. 
This  section  is  identical  \nth  sections  four  and  five  of  the  Sher- 
man Act,  except  that  jurisdiction  is  vested  in  the  district  courts 
rather  than  in  the  circuit  courts,  the  latter  having  been  abolished 
in  1911. 

The  United  States  government  through  the  Department  of 
Justice  has  jurisdiction,  it  should  be  observed,  over  all  violations 
of  the  act,  including  ^'iolations  of  sections  two,  three,  seven,  and 
eight.  With  respect  to  these  sections,  therefore,  the  Department 
of  Justice  shares  jurisdiction  with  the  Federal  Trade  Commis- 
sion, the  Interstate  Commerce  Commission,  and  the  Federal 
Reserve  Board.  Whether  this  will  lead  to  friction  between  these 
government  agencies  remains  to  be  seen. 

In  dealing  with  violations  of  the  act  the  hands  of  the  govern- 
ment are  strengthened  by  section  fourteen,  which,  in  line  with 
the  recommendation  of  the  President,  makes  guilt  personal. 
This  section  declares  "  that  whenever  a  cor]:)oration  shall  violate 
any  of  the  penal  provisions  of  the  antitrust  laws,  such  \iolation 
shall  be  deemed  to  be  also  that  of  the  individual  directors,  officers, 
or  agents  of  such  corporation  who  shall  have  authorized,  ordered, 
or  done  any  of  the  acts  constituting  in  whole  or  in  part  such  vio- 
lation," and  such  violation  shall  subject  the  director,  officer,  or 
agent  to  the  penalty  of  a  fine  not  exceeding  $5,000,  or  to  impris- 
onment for  a  period  not  to  exceed  one  year,  or  to  both,  in  the 
discretion  of  the  court. 

The  "personal  guilt"  section  applies  only  to  the  penal  pro- 
visions of  the  anti-trust  laws,  which  limits  it  to  sections  one  to 
three  of  the  Sherman  Act,  section  seventy-three  of  the  Wilson 


370        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Tariff  Act  of  1S94  as  amended  in  19 13,  and  sections  nine  and 
ten  of  the  Clayton  Act.  As  this  section  passed  the  House  it 
applied  to  any  violation  of  the  anti-trust  laws.  But  in  the  Sen- 
ate the  word  penal  was  inserted,  and  the  penalties  were  elimin- 
ated except  from  section  three,  dealing  with  tying  contracts. 
These  changes  being  accepted  in  conference  (the  conference 
committee  on  its  own  account  took  out  the  penalties  from  sec- 
tion three),  the  net  result  was  to  limit  greatly  the  scope  of  this 
section.  Whether  the  result  was  also  to  reduce  its  effectiveness 
depends  on  the  relative  merits  of  criminal  and  civil  remedies. 
Were  juries  willing  to  convict,  undoubtedly  the  criminal  rem- 
edies would  be  the  more  effective;  but  as  a  matter  of  fact,  juries 
have  shown  a  reluctance  to  apply  the  harsher  remedy.  Perhaps, 
now  that  the  anti-trust  laws  have  been  affirmed  and  the  pro- 
vision for  personal  guilt  inserted,  they  will  become  more  stern 
in  this  regard.  On  the  other  hand,  in  some  respects  civil  rem- 
edies are  more  effective.  In  a  criminal  prosecution  suit  may  be 
brought  only  by  the  Department  of  Justice,  and  guilt  must  be 
established  beyond  a  reasonable  doubt;  whereas  in  a  civil  action 
any  one  can  bring  suit,  and  a  preponderance  of  evidence  suffices. 

(4)  Individual  suits  for  injunctive  relief.  Section  sixteen 
provides  that  any  person  or  concern  is  entitled  to  injunctive 
relief,  in  any  court  of  the  United  States  having  jurisdiction  over 
the  parties,  against  threatened  loss  or  damage  by  a  violation 
of  the  anti-trust  laws,  including  sections  two,  three,  seven,  and 
eight  of  the  Clayton  Act;  and  that  a  preliminary  injunction  is 
to  be  issued  upon  a  showing  that  the  danger  of  irreparable 
damage  is  immediate,  and  upon  the  execution  of  a  bond  against 
damages  for  an  injunction  improvidently  granted,  provided, 
that  only  the  United  States  may  bring  suit  for  injunctive  relief 
against  common  carriers.  The  express  pro\ision  that  the  new 
method  of  relief  is  to  apply  to  sections  two,  three,  seven,  and 
eight,  shows  conclusively  that  the  remedy  of  Commission  en- 
forcement provided  in  section  eleven  is  cumulative  in  character 
and  not  exclusive. 

Section  sixteen  gives  the  person  or  concern  injured  in  his  (or 
its)  business  a  remedy  that  it  had  not  possessed  before.    For- 


THE  TRUST  LEGISLATION  OF  1914  371 

merly  only  the  United  States  government,  under  the  direction  of 
the  Attorney  General,  could  enjoin  a  violation  of  the  anti-trust 
act;  and  if  the  Attorney  General  was  negligent  no  injunctive 
relief  could  be  had.  As  the  law  now  stands  an  independent 
concern  attacked  through  some  unfair  device  may  secure  an 
injunction  against  the  emi^loyment  of  this  device,  and  thus  pro- 
tect its  existence,  rather  than  sue  for  damages,  as  formerly, 
after  injury  and  perhaps  bankruptcy  had  resulted.  In  addition, 
the  business  public  becomes  the  ally  of  the  Government  in  en- 
forcing the  anti-trust  laws. 

Reference  may  also  be  made  to  section  twelve,  which  liberal- 
izes the  procedure  in  the  courts  by  providing  that  suit  under  the 
anti-trust  laws  against  a  corporation  may  be  brought,  not  only 
in  the  judicial  district  whereof  it  is  an  inhabitant,  as  under  the 
law  previously,  but  also  in  any  district  where  it  may  be  found  or 
transact  business.  This  clause  makes  it  easier  to  bring  suit, 
since  it  largely  does  away  with  long  distance  litigation,  and  thus 
decreases  the  expense  to  the  plaintiff. 

The  possibility  that  the  whole  act  will  be  rendered  invalid 
by  reason  of  the  unconstitutionality  of  any  part  thereof  is 
eliminated  by  the  provision  that  the  judgment  by  any  court 
of  competent  jurisdiction  that  any  clause,  sentence,  paragraph, 
or  part  of  the  act  is  invalid  is  not  to  impair  or  invahdate  the 
remainder  of  the  act.^  A  similar  provision  had  been  inserted 
in  the  Tariff  Act  and  the  Federal  Reserve  Act,  both  enacted 
the  previous  year. 

Labor  Provisions 

The  Clayton  Act  contains  a  number  of  provisions  much 
desired  by  labor  organizations.  Thus  section  twenty  limits  the 
use  of  the  injunction  in  labor  disputes,  and  appears  to  legalize 
strikes,  picketing,  and  boycotts.^  And  section  six  declares 
"that  the  labor  of  a  human  being  is  not  a  commodity  or  article 
of  commerce.     Nothing  contained  in  the  antitrust  laws  shall 

'  Section   twenty-six. 

-  But  see  the  decision  of  the  Supreme  Court  in  the  Duplex  Printing  Press 
Company  case,  254  U.  S.  443.    (January  3,  1921). 


372        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

be  construed  to  forbid  the  existence  and  operation  of  laborj 
agricultural,  or  horticultural  organizations,  instituted  for  the 
purposes  of  mutual  help,  and  not  having  capital  stock  or  con- 
ducted for  profit,  or  to  forbid  or  restrain  individual  members 
of  such  organizations  from  lawfully  carrying  out  the  legitimate 
objects  thereof;  nor  shall  such  organizations,  or  the  members 
thereof,  be  held  or  construed  to  be  illegal  combinations  or  con- 
spiracies in  restraint  of  trade,  under  the  antitrust  laws." 

This  section,  together  with  section  twenty,  has  been  ac- 
claimed as  constituting  a  bill  of  rights  for  labor.  While  there  is 
some  doubt  as  to  the  interpretation  which  these  provisions  will 
receive  at  the  hands  of  the  courts,  there  is  no  doubt  that  organ- 
ized labor  considers  that  it  has  won  a  great  victory.  President 
Gompers,  of  the  American  Federation  of  Labor,  has  said  that 
the  declaration  that  the  labor  of  a  human  being  is  not  a  com- 
modity or  article  of  commerce  "is  the  Industrial  Magna  Carta 
upon  which  the  working  people  will  rear  their  structure  of  indus- 
trial freedom."  ^  On  the  other  hand,  an  economist  of  note 
refers  to  this  declaration  as  an  "empty  blague."  -  The  provi- 
sions that  nothing  contained  in  the  anti-trust  laws  shall  be  con- 
strued to  forbid  the  existence  and  operation  of  labor  organiza- 
tions, and  that  these  organizations,  or  their  members,  shall  not 
be  held  to  be  illegal  combinations  or  conspiracies  in  restraint  of 
trade  under  the  anti-trust  laws  apparently  removes  doubt  as  to 
the  legality  of  such  organizations, — organizations  which  for- 
merly, according  to  Mr.  Gompers,  existed  only  on  the  suffer- 
ance of  the  administration.^  The  above  provisions  apply  like- 
wise to  agricultural  and  horticultural  organizations  not  having 
capital  stock  or  conducted  for  profit.  However,  unlike  the  labor 
organizations,  many  agricultural  organizations  have  capital 
stock,  and  most  of  them  are  conducted  for  profit;  '*  and  therefore 
this  exemption  will  not  be  likely  to  have  such  broad  conse- 
quences as  the  exemption  of  labor  organizations,  unless  indeed 

'American  Federationist,  21,  pp.  971-2  (November,  1914). 
2  Young,  Journal  of  Political  Economy,  23,  p.  418. 
'  House  Report  no.  627,  63rd  Cong.,  and  Sess, 
*  Ibid. 


THE  TRUST  LEGISLATION  OF  1914  373 

the  courts  hold  that  the  latter  are  conducted  for  profit.  The 
provision  that  nothing  in  the  anti-trust  laws  shall  be  construed 
to  forbid  or  restrain  individual  members  of  labor  and  agricul- 
tural organizations  from  "lawfully  carrying  out  the  legitimate 
objects  thereof"  would  appear  to  be  meaningless.  It  is  difficult 
to  conceive  of  a  law  forbidding  an  organization  from  lawfully 
carrying  out  its  legitimate  objects. 


CHAPTER  XVI 
THE  WEBB-POMERENE  ACT  ^ 

The  only  important  anti-trust  legislation  enacted  since  1914 
is  the  Webb-Pomerene  Act,  designed  to  promote  the  American 
export  trade  through  the  legalization  of  export  associations.  It 
is  proposed  in  this  chapter  to  outline  briefly  the  conditions  that 
gave  rise  to  a  demand  for  such  legislation ;  to  trace  the  progress 
of  the  bill  through  Congress;  to  describe  the  provisions  of  the 
act;  and  to  call  attention  to  some  possible  objections.  First 
as  to  the  conditions  that  led  to  the  passage  of  the  Webb  Act. 

During  the  early  years  of  the  twentieth  century  it  was  freely 
predicted  that  American  manufacturers,  combined  as  many  of 
them  were  in  the  modern  trust,  were  to  capture  the  markets  of 
the  world.  Only  a  few  years  later  the  opinion  was  as  commonly 
expressed  that  without  legislation  permitting  cooperation  in  the 
American  export  trade  our  manufacturers  were  no  match  for 
their  foreign  competitors.  Several  reasons  were  given  for  the 
unequal  conditions  of  competition.  In  the  first  place,  American 
manufacturers  in  striving  for  business  abroad  had  to  meet  the 
vigorous  rivalry  of  powerful  foreign  combinations,  often  inter- 
national in  scope.  These  combinations  were  frequently  aided 
by  their  respective  governments,  and  in  some  cases  partici- 
pated in  by  these  governments.  The  stock  illustration  was 
Germany,  which  had  achieved  the  most  notable  success  in  the 

^On  the  Webb-Pomerene  Act  see:  Congressional  Record,  vols.  53-56; 
Report  of  the  Federal  Trade  Commission  on  Cooperation  in  American  Ex- 
port Trade,  in  two  parts;  House  Report  no.  1118,  64th  Cong.,  ist  sess.; 
Senate  Report  no.  1056,  64th  Cong.,  2nd  sess.;  House  Report  no.  50,  65th 
Cong.,  ist  sess.;  Proceedings  of  the  National  Foreign  Trade  Conventions; 
Duncan,  Journal  of  Political  Economy,  25,  pp.  313-338  (1917);  Notz,  Journal 
of  Political  Economy,  27,  pp.  525-543  (1919);  and  Notz,  Yale  Law  Journal, 
29,  pp.  29-45  (1919)- 

374 


THE  WEBB-POMERENE  ACT  375 

rapid  development  of  its  foreign  trade  and  which,  being  highly 
unpopular  after  19 14,  furnished  a  good  talking  point.  However, 
such  combinations  were  common  in  other  countries,  for  example, 
Belgium,  Holland,  Italy,  and  Japan.  In  Great  Britain,  on  the 
other  hand,  despite  the  absence  of  widespread  combination,  a 
large  and  profitable  export  trade  was  being  maintained.  This 
was  attributed  to  the  unusually  favorable  conditions,  notably 
the  advantage  of  an  early  start,  the  possession  of  excellent  ship- 
ping and  banking  facilities,  and  the  high  grade  of  service  ren- 
dered by  the  British  commission  merchants,  not  to  mention  the 
export  houses  buying  and  selling  goods  for  ex])ort  on  their  own 
account.  Some  American  companies,  particularly  the  United 
States  Steel  Cori:)oration,  the  Standard  Oil  Company,  and  the 
International  Harvester  Company,  were  admittedly  strong 
enough  to  cope  with  these  foreign  combinations,  yet  the  smaller 
concerns  in  these  industries,  as  well  as  nearly  all  of  the  concerns 
in  certain  industries  in  which  competitive  conditions  prevailed, 
were  said  to  be  at  a  great  disadvantage.  Hence  the  need  of 
association. 

Secondly,  in  the  leading  countries  of  the  world  associations 
for  the  promotion  of  export  business  were  permitted, — an  ad- 
vantage that  the  Sherman  Act  denied,  so  it  was  believed,  to 
American  exporters.  In  Germany,  for  example,  prior  to  the 
war  there  were  600  important  cartels,  many  of  which  dominated 
the  exjoort  trade  in  their  particular  industry.^  These  cartels 
made  an  especial  effort  to  extend  the  foreign  trade,  frequently 
selling  at  a  loss  in  the  endeavor  to  gain  a  foothold  or  to  maintain 
a  position  once  established.  In  order  that  such  agencies  might 
be  met  on  more  equal  terms  the  association  of  American  manu- 
facturers in  a  common  selling  agency  was  held  to  be  necessary. 
The  need  for  such  association,  it  may  be  observed,  was  not 
equally  great  in  all  branches  of  the  export  trade.  Thus,  Ameri- 
can foodstuffs  and  raw  materials  could  readily  be  sold  even 
without   an    export   organization,    though   cooperation   might 

1  Report  of  the  Federal  Trade  Commission  on  Cooperation  in  the  Ameri- 
can Export  Trade,  I,  p.  5.  Hereafter  referred  to  as  Report  on  Cooperation  in 
American  Export  Trade. 


376        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

somewhat  reduce  the  cost  of  distribution,  and  might  increase 
the  bargaining  power  of  American  producers.  There  was  even 
less  occasion  for  association  of  the  manufacturers  of  specialties. 
Here  the  lack  of  standardization  would  make  difficult  the  work 
of  an  export  organization.  Moreover,  less  competition  was 
encountered  in  the  sale  of  specialties,  such  as  safety  razors, 
for  example,  and  as  a  result  cooperation  was  not  so  important. 
Of  course,  the  exporters  of  specialties  also  had  to  create  their 
market  abroad,  but  many  of  them  had  found  it  to  their  advan- 
tage to  do  this  individually.  It  was  in  the  manufactured  staples 
that  the  advantages  of  cooperation  were  most  marked.  Such 
goods  met  vigorous  competition  abroad,  often  at  the  hands  of 
large  organizations.  To  capture  foreign  trade  under  such  cir- 
cumstances it  was  usually  necessary  to  study  the  foreign  re- 
quirements; to  employ  salesmen  familiar  with  foreign  conditions 
and  customs;  to  advertise  and  demonstrate;  to  keep  in  touch 
with  credit  conditions,  so  that  credit  might  be  extended  wisely; 
to  establish  abroad  branches  and  warehouses  in  order  that  the 
foreign  customer  might  count  on  prompt  and  regular  deliveries; 
in  a  word,  to  maintain  an  effective  system  of  direct  representa- 
tion. 

Even  in  the  foreign  trade  in  manufactured  staples  export 
associations  were  not  always  necessary  or  even  advantageous. 
In  many  branches  there  existed  highly  efficient  export  commis- 
sion houses  handling  sales  on  a  commission  basis,  and  export 
merchants  buying  and  selling  goods  on  their  own  account.  These 
agencies  in  both  Great  Britain  and  the  United  States  had  played 
a  notable  part  in  the  development  of  export  trade.  In  fact, 
British  export  trade  had  been  largely  built  up  through  their 
efforts.^  These  export  houses  had  already  developed  efficient 
organizations,  which  were  familiar  with  foreign  conditions; 
and  they  now  possess  an  advantage  over  associations  in  this 
country  by  virtue  of  the  fact  that  they  handle  imports  as  well  as 
exports,  whereas  the  American  associations  under  the  provisions 
of  the  Webb  Act  may  deal  solely  in  exports.  For  the  export 
houses,  owning  their  own  ships,  as  many  of  them  do,  the  han- 
1  See  Report  on  Cooperation  in  American  Export  Trade,  I,  p.  94;  II,  p.  320. 


THE  WEBB-POMERENE  ACT  377 

dling  of  imports  as  well  as  exports  represents  an  undoubted  saving 
in  transportation,  in  that  it  more  commonly  provides  a  cargo  in 
both  directions.  However,  the  system  of  direct  representation 
also  has  its  advantages.  Thus  it  is  to  be  anticipated  that  the 
foreign  trade  in  any  particular  article,  and  of  course  the  domestic 
trade  also,  will  be  more  effectively  pushed  by  an  agency  whose 
capital  is  invested  in  plants  and  equipment  devoted  to  the  man- 
facture  of  that  product  than  by  an  agency  having  no  such  invest- 
ment and  dealing  in  a  great  variety  of  products.  An  association 
obviously  has  an  individual  interest  in  its  product,  an  interest 
which  an  export  house  in  the  very  nature  of  the  case  lacks. 

Thirdly,  in  some  of  the  foreign  markets  American  producers 
were  confronted  with  well  organized  combinations  of  buyers. 
Thus,  four  London  concerns  were  said  to  fix  the  price  of  silver, 
and  American  exporters  in  making  sales  in  Great  Britain,  India 
and  elsewhere  had  to  accept  the  price  fixed  by  these  firms.  ^  For 
some  time  past  the  world's  copper  trade  had  been  controlled  by 
a  German  metal-buying  agency.-  Such  associations,  it  was  said, 
by  playing  off  one  American  exporter  against  another  were  able 
to  beat  down  the  price  of  American  goods  destined  for  export. 
In  the  case  of  copper  the  aforementioned  German  concern, 
according  to  Mr.  John  D.  Ryan,  president  of  the  Amalgamated 
Copper  Company,  by  means  of  such  tactics  bought  American 
copper  delivered  abroad  during  1903  to  19 13  at  83/100  of  a  cent 
per  pound  less  than  domestic  buyers  paid  for  delivery  at  New 
York  or  the  Connecticut  Valley.^  The  association  of  American 
producers  in  a  selling  agency,  it  was  claimed,  would  eliminate  the 
competition  between  American  firms,  and  thus  make  it  possible 
for  them  to  secure  better  prices  for  articles  sold  abroad. 

Finally,  the  development  of  our  export  trade  was  said  to  be 
hampered  by  inadequate  banking  and  credit  facilities  abroad;  by 
discrimination  against  American  goods  by  foreign  steamship 
lines;  by  the  small  amount  of  American  investments  in  the 
securities  of  foreign  companies;  and  by  our  comparative  inex- 

1  Report  on  Cooperation  in  American  Export  Trade,  I,  p.  7. 

-  Ibid.,  p.  7. 

3  Ib:d.,  II,  p.  261. 


378        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

perience.  The  last  obstacle  perforce  had  to  be  overcome  by  thi 
producers  and  manufacturers  themselves.  Upon  them  neces- 
sarily fell  the  task  of  developing  the  requisite  organization,  of 
acquiring  an  intimate  acquaintanceship  with  the  requirements  of 
foreign  markets,  and  by  attention  to  quality  and  service  of 
creating  a  demand  for  products  "  Made  in  America."  The 
additional  business  that  comes  through  investments  in  foreign 
enterprises  was  to  be  secured  by  a  campaign  to  educate  American 
investors  in  the  advantages  of  foreign  securities, — a  campaign 
now  well  under  way.  The  other  difficulties  were  to  be  met  by 
legislation  permitting  foreign  banking,  establishing  an  American 
merchant  marine,  and  authorizing  producers  and  manufacturers 
to  combine  for  export  purposes.  The  Webb  bill  was  thus  only 
one  stone  in  the  foundation  upon  which  our  increased  foreign 
trade  was  to  rest. 

The  desirability  of  legalizing  associations  for  export  trade  was 
inquired  into  by  the  Federal  Trade  Commission  under  the  powers 
granted  to  it  in  §  6  (h)  of  the  Trade  Commission  Act,  and  a  deci- 
sion highly  favorable  to  the  principle  underlying  the  Webb  Act 
was  reached.^  The  Commission  pointed  out  that  such  large 
concerns  as  the  United  States  Steel  Corporation,  the  Interna- 
tional Harvester  Company,  the  United  Shoe  Machinery  Com- 
pany, the  National  Cash  Register  Company,  the  General  Electric 
Company  and  others  did  not  need  to  enter  into  export  associa- 
tions, since  they  individually  were  well  able  to  compete  with 
foreign  combinations."  Rather  the  purpose  of  the  Webb  bill  was 
to  enable  a  number  of  smaller  companies  not  having  a  large 
enough  volume  of  business  to  justify  the  carn,'ing  on  of  an  export 
trade  by  themselves  to  cooperate  for  this  purpose  and,  by  dis- 
triJ:)uting  the  overhead  charges  over  their  combined  foreign  sales, 
to  bring  the  costs  down  to  a  reasonable  figure.  Other  advantages 
to  be  gained  through  cooperative  action  were  the  securing  of 
better  credit  information  and  thus  the  better  financing  of  foreign 
business,  an  ability  to  give  longer  credits  when  desirable,  the 
greater  ease  with  which  initial  losses  could  be  carried,  a  larger 

*  See  Report  on  Cooperation  in  American  Export  Trade,  I,  p.  379. 
^  Ibid.,  pp.  161-162,  242. 


THE  WEBB-POMERENE  ACT  379 

assortment  of  goods,  and  the  exchange  of  ideas  among  the 
members  of  the  association.  While  there  is  some  reason  to 
beheve  that  an  association  of  competing  concerns  to  share  the 
expenses  of  a  foreign  selling  agency  was  not  in  fact  prohibited  by 
the  anti-trust  laws,^  provided  it  did  not  embrace  too  large  a 
percentage  of  the  trade,  nevertheless  the  uncertainty  as  to  the 
legal  status  of  such  an  arrangement  had  deterred  many  concerns 
that  were  anxious  to  cooperate  from  making  the  venture.  The 
Commission  after  a  study  of  the  legal  aspects  of  the  problem  was 
unable  to  assure  manufacturers  that  common  selling  agencies 
were  lawful;  and  accordingly  it  recommended  the  passage  of  an 
act  that  would  place  this  right  beyond  dispute.  This  recommen- 
dation was  made,  however,  subject  to  the  condition  that  ample 
precautions  be  taken  to  prevent  the  export  associations  from 
being  used  to  restrain  trade  in  the  United  States  in  violation  of 
the  Sherman  Law.- 

The  campaign  to  legalize  export  associations  was  launched 
at  the  first  convention  of  the  National  Foreign  Trade  Council, 
held  in  Washington,  D.  C,  toward  the  close  of  May,  19 14. 
There  was  thus  no  connection  between  the  initiation  of  this 
movement  and  the  European  war.  However,  the  outbreak  of  the 
war  on  August  i,  1914,  followed  as  it  was  by  a  short  period  of 
depression  in  this  country,  presented  conditions  favorable  for  an 
agitation  to  legalize  combinations  for  the  export  trade, — it  being 
alleged  that  foreign  business  was  necessary  to  "keep  the  home 
fires  burning"  and  to  provide  employment  for  labor.  In  May, 
1915,  the  Federal  Trade  Commission,  organized  only  two  months 
previously,  began  an  investigation  of  the  foreign  trade  with  par- 
ticular reference  to  the  advisability  of  permitting  cooperation. 
A  summary  of  its  findings,  made  public  in  May,  1916,  strongly 
recommended  the  enactment  of  permissive  legislation.^    At  the 

'  Some  such  associations,  believed  to  be  legal,  had  been  organized  prior  to 
the  passage  of  the  Webb  Act.  See  Official  Report  of  the  Fourth  National 
Foreign  Trade  Convention,  1917,  p.  187. 

^  Report  on  Cooperation  in  American  Export  Trade,  I,  p.  10. 

'  The  full  report,  in  two  volumes,  though  dated  June  30,  1916,  was  not 
published  until  December,  1916. 


380       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

date  of  this  report  a  vast  foreign  trade  was  being  carried  on, 
and  there  was  no  immediate  occasion  for  concern  on  this  score. 
The  campaign  cry  was  thus  modified  to  meet  the  new  situation. 
Attention  was  now  directed  to  the  tremendous  struggle  for  for- 
eign trade  that  would  manifest  itself  upon  the  conclusion  of 
hostilities,  and  the  country  was  urged  by  the  interested  parties  to 
have  its  loins  girded  for  the  fray  when  it  arrived. 

The  Webb  bill  was  first  introduced  in  the  House  by  Repre- 
sentative Webb  of  North  Carolina  on  August  8,  1916,  some  three 
months  after  the  publication  of  the  summary  of  the  report  of  the 
Federal  Trade  Commission.  It  was  referred  to  the  Committee 
on  the  Judiciary,  of  which  Mr.  Webb,  who  had  so  skilfully  and 
tactfully  piloted  the  Clayton  Act  through  the  House  two  years^ 
previously,  was  chairman.  After  being  amended  in  important 
particulars,  the  significance  of  which  will  be  noted  later, ^  it 
passed  the  House  on  September  2  by  a  vote  of  199-25.-  Six  days 
later  the  Senate  adjourned;  and  the  Webb  bill  was  permitted 
to  slumber  in  committee. 

President  Wilson  in  his  address  to  the  next  Congress  on 
December  5,  1916,  urged  the  prompt  passage  of  the  Webb  bill. 
He  presented  no  argument  on  behalf  of  the  bill,  but  merely 
pointed  out  that  a  great  opportunity  in  foreign  trade  had  pre- 
sented itself,  and  that  this  opportunity  might  escape  us  if  we 
hesitated  or  delayed  to  remove  the  legal  obstacles  that  stood  in 
the  way. 

Notwithstanding  the  recommendation  of  the  President  the 
Webb  bill  made  practically  no  progress  during  the  short  session 
from  December  4,  1916,  to  March  4,  1917.  The  Senate  Com- 
mittee on  Interstate  Commerce,  of  which  Senator  Pomerene  was 
chairman,  reported  out  the  bill  on  February  16,  1917,  with 
amendments,  but  the  measure  was  not  discussed  in  either  the 
Senate  or  the  House. 

During  the  next  session  (April  2,  1917-October  6,  1917)  the 
bill  in  amended  form  passed  the  House  for  the  second  time,  but 
did  not  come  to  a  vote  in  the  Senate.  The  bill  as  reported  out 
by  the  House  Committee  on  the  Judiciary  on  May  11,  191 7,  was 

'  See  p.  382.  ^  Cong.  Record,  September  2,  1916,  p.  13732. 


THE  WEBB-POMERENE  ACT  381 

revised  in  several  important  particulars  to  conform  to  the  sug- 
gestions of  the  Senate  Committee  on  Interstate  Commerce.  As 
revised  by  the  House  Committee,  but  without  any  further 
changes,  it  passed  the  House  on  June  13  by  a  vote  of  242-29, 
having  been  debated  on  only  one  day,  the  day  of  its  passage.^ 
The  measure  was  briefly  debated  in  the  Senate  on  three  separate 
days,  but  it  was  not  put  to  a  vote.  Senator  Pomerene  having 
concluded  after  an  investigation  that  it  was  impossible  to  secure 
action  during  the  current  session. 

With  the  convening  of  the  second  session  of  the  65th  Congress 
President  Wilson  on  December  4, 1917,  again  called  the  attention 
of  Congress  to  the  Webb  bill,  saying  it  "ought  by  all  means  to  be 
completed  at  this  session."-  On  this  occasion  the  Senate  was 
prompt  indeed.  It  debated  the  measure  for  four  days,  and  on 
December  12  accepted  it,  slightly  amended,  by  a  vote  of  51-11.^ 
The  House  objected  to  the  Senate  amendments,  and  conferees 
were  therefore  appointed.  The  report  of  the  conference  com- 
mittee was  presented  on  April  2,  191S;  and  was  accepted  by  both 
the  Senate  and  the  House  on  April  6.  The  bill  was  signed  by  the 
President  on  April  10. 

The  act  is  divided  into  five  sections.  Section  one  is  devoted  to 
a  definition  of  certain  terms  used  in  the  act.  The  word  "  associa- 
tion" is  defined  as  "  any  corporation  or  combination,  by  contract 
or  otherwise,  of  two  or  more  persons,  partnerships,,  or  corpora- 
tions." The  words  "export  trade"  mean  "solely  trade  or 
commerce  in  goods,  wares,  or  merchandise  exported,  or  in  the 
course  of  being  exported  from  the  United  States  or  any  Territory 
thereof  to  any  foreign  nation;  but  .  .  .  shall  not  be  deemed  to 
include  the  production,  manufacture,  or  soiling  for  consumption 
or  for  resale,  within  the  United  States  or  any  Territory  thereof, 
of  such  goods,  wares,  or  merchandise,  or  any  act  in  the  course  of 
such  production,  manufacture,  or  selling  for  consumption  or  for 
resale."  ■* 

1  Cong.  Record,  June  13,  1917,  p.  3584- 

2  Ibid.,  December  4,  1917,  p.  20. 
^Ibid.,  December  12,  1917,  p.  186. 

*  In  the  opinion  of  the  Federal  Trade  Commission,  trade  with  the  Philip.- 


382        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

The  bill  as  it  had  passed  the  House  on  September  2,  191 6, 
instead  of  providing  that  "export  trade"  should  not  be  deemed 
to  include  the  production,  manufacture,  or  selling  for  consump- 
tion or  for  resale  within  the  United  States  of  exported  goods,  had 
provided  that  it  should  not  be  deemed  to  include  the  production, 
manufacture,  trading  in,  or  marketing  within  the  United  States 
of  such  goods. ^  In  this  form  obviously  the  measure  was  highly 
unsatisfactory  to  those  desiring  to  form  export  associations;  for 
unless  an  export  association  could  either  produce  or  trade  in, 
that  is,  buy,  the  articles  to  be  exported,  its  activities  would  be 
limited  to  handling  goods  on  a  commission  or  agency  basis,  if 
indeed  that  was  permissible.  If  it  was  deemed  advisable  to 
allow  export  associations  there  was  no  virtue  in  unduly  hamper- 
ing them;  and  accordingly  the  Senate  struck  out  the  words 
"trading  in,  or  marketing,"  and  substituted  the  words  "or  sell- 
ing for  consumption  or  for  resale."  By  these  changes,  con- 
curred in  by  the  House,  an  export  association  was  permitted 
to  purchase  goods  in  this  country  for  export  purposes,  but 
it  might  not  produce  them  itself  nor  sell  them  in  this 
country. 

Section  two  provides  that  nothing  in  the  Sherman  Act  of 
1890  "shall  be  construed  as  declaring  to  be  illegal  an  associa- 
tion entered  ijito  for  the  sole  purpose  of  engaging  in  export 
trade  and  actually  engaged  solely  in  such  export  trade,  or  an 
agreement  made  or  act  done  in  the  course  of  export  trade  by 
such  association,  provided  such  association,  agreement,  or  act 
is  not  in  restraint  of  trade  within  the  United  States,  and  is  not 
in  restraint  of  the  export  trade  of  any  domestic  competitor  of 
such  association:  And  provided  further,  That  such  association 
does  not,  either  in  the  United  States  or  elsewhere,  enter  into  any 
agreement,  understanding,  or  conspiracy,  or  do  any  act  which 
artificially  or  intentionally  enhances  or  depresses  prices  within 
the  United  States  of  commodities  of  the  class  exported  by  such 

pine  Islands,  Porto  Rico,  and  Hawaii  is  not  export  trade.    Annual  Report, 
1918,  p.  40. 

1  See  text  of  bill  in  Annual  Report  of  the  Federal  Trade  Commission, 
1916,  pp,  60-61. 


THE  WEBB-POMERENE  ACT  3S3 

association,  or  which  substantially  lessens  competition  within 
the  United  States  or  otherwise  restrains  trade  therein." 

Section  two  of  the  act  as  above  quoted  is  identical  with  the 
bill  as  it  first  passed  the  House  down  to  the  words  "in  restraint 
of  trade  within  the  United  States;"  but  differs  vitally  from  that 
point  on.  The  House  bill  had  legalized  export  associations  pro- 
vided they  were  not  in  restraint  of  trade  within  the  United 
States,  and  provided  they  did  not  restrain  the  export  trade  of  the 
United  States}  The  Senate  Committee  on  Interstate  Commerce 
pointed  out  that  this  second  proviso  took  away  a  right  granted 
elsewhere  in  the  bill  to  enter  into  associations  and  make  agree- 
ments in  restraint  of  export  trade;  and  it  accordingly  modified 
the  proviso  so  that  it  merely  forbade  a  restraint  of  the  export 
trade  of  any  domestic  competitor  of  such  association}  This 
change  was  accepted  by  the  Senate  and  the  House.  Having 
removed,  however,  the  prohibition  against  the  restraint  of  the 
export  trade  of  the  United  States,  it  became  necessary  to  pro- 
vide in  some  way  against  the  use  of  such  associations  to  influ- 
ence prices  improperly  in  this  country.  Accordingly  the  Senate 
Committee  added  the  last  proviso  dealing  with  prices  in  the 
United  States.  The  bill  as  it  became  law  is  identical  with  the 
amendment  of  the  Senate  Committee  except  in  three  particu- 
lars: (i)  the  Senate  inserted  the  words  "or  depresses"  after 
"enhances"  in  order  to  prevent  export  associations  from  beat- 
ing down  the  prices  of  goods  purchased  by  them;  ^  (2)  the  Senate 
struck  out  the  words  "and  unduly"  enhances  prices,  from  an 
uncertainty  as  to  the  meaning  of  "undue"  enhancement;  ^  and 
(3)  the  conference  committee  added  the  words  at  the  close  of 
section  two  reading  "or  which  substantially  lessens  competi- 
tion within  the  United  States  or  otherwise  restrains  trade 
therein." 

1  This  second  proviso  was  not  in  the  bill  as  originally  introduced  in  the 
House  by  Mr.  Webb,  but  he  agreed  to  the  change.  See  Cong.  Record, 
September  2,  1916,  p.  13735- 

2  See  Senate  Report  no.  1056,  64th  Cong.,  2nd  Sess. 

3  Cong.  Record,  May  23,  1917,  p.  2787;  and  September  22, 1917,  p.  7325. 
■*  Ibid.,  December  12,  191 7,  p.  184. 


3^4       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Section  three  amends  section  seven  of  the  Clayton  Act  by 
providing  that  any  corporation  may  acquire  all  or  part  of  the 
stock  or  other  capital  of  any  company  organized  in  accordance 
with  the  terms  of  the  Webb  Act,  "unless  the  effect  of  such  acqui- 
sition or  ownership  may  be  to  restrain  trade  or  substantially 
lessen  competition  within  the  United  States." 

Section  four  declares  that  the  provisions  of  the  Trade  Com- 
mission Act  with  regard  to  unfair  methods  of  competition 
"shall  be  construed  as  extending  to  unfair  methods  of  competi- 
tion used  in  export  trade  against  competitors  engaged  in  export 
trade,  even  though  the  acts  constituting  such  unfair  methods  are 
done  without  the  territorial  jurisdiction  of  the  United  States." 
This  section  extends  the  jurisdiction  of  the  Federal  Trade  Com- 
mission over  unfair  competition  to  foreign  trade  as  well  as  to 
domestic;  and  is  in  line  with  a  recommendation  of  that  body 
in  its  report  on  Cooperation  in  American  Export  Trade.  ^  The 
prohibition  of  unfair  competition,  it  should  be  observed,  relates 
only  to  methods  used  against  American  competitors  engaged 
in  export  trade.  The  section  says,  to  be  sure,  competitors 
engaged  in  export  trade,  without  qualification,  yet  since  export 
trade  is  defined  as  trade  in  goods  exported  from  the  United 
States,  it  is  clear  that  it  applies  only  to  American  competitors. 
The  provisions  of  section  four  are  applicable  not  only  to  associ- 
ations, but  also  to  corporations  and  individual  exporters. 

Section  five  provides  that  every  association  organized  under 
the  act  shall  file  with  the  Federal  Trade  Commission  a  state- 
ment giving  certain  information,  including  the  location  of  its 
offices,  the  names  and  addresses  of  all  of  its  officers,  stockholders, 
or  members,  and  a  copy  of  its  articles  of  incorporation  or  associ- 
ation; and  that  on  January  first  of  each  year  a  similar  statement, 
noting  changes,  if  any,  shall  be  made.  Every  association  "shall 
also  furnish  to  the  commission  such  information  as  the  commis- 
sion may  require  as  to  its  organization,  business,  conduct,  prac- 
tices, management,  and  relation  to  other  associations,  corpora- 
tions, partnerships,  and  individuals."  Any  association  failing 
to  comply  with  these  requirements  is  to  be  denied  the  benefits 

■  I,  p.  380. 


THE  WEBB-POMERENE  ACT  •  385 

of  sections  two  and  three  of  the  act,  and  to  be  subject  to  a  fine 
of  $100  per  day  to  be  recovered  by  the  Attorney  General. 

The  foregoing  provisions  are  substantially  as  in  the  original 
House  bill,  except  for  the  clause,  inserted  in  the  Senate,  permit- 
ting the  Commission  to  inquire  into  the  organization,  business, 
etc.,  of  export  associations.  But  because  of  its  amendments  to 
section  two,  dealing  with  the  effect  of  export  associations  on 
prices  or  competition  in  the  United  States,  the  Senate  deemed 
it  advisable  to  add  another  paragraph  to  section  five,  establish- 
ing administrative  machinery  for  the  enforcement  of  the  restric- 
tions imposed  in  section  two.  It  accordingly  provided  that 
whenever  the  Federal  Trade  Commission  had  reason  to  believe 
that  the  provisos  of  section  two  had  been  violated,  it  should  con- 
duct an  investigation;  and  if  upon  investigation  it  concluded 
that  the  law  had  been  violated  "it  may  make  to  such  associa- 
tion recommendations  for  the  readjustment  of  its  business,  in 
order  that  it  may  thereafter  maintain  its  organization  and  man- 
agement and  conduct  its  business  in  accordance  with  law." 
If  the  association  fails  to  comply  with  the  recommendations  of 
the  Federal  Trade  Commission,  the  latter  is  to  refer  its  findings 
and  recommendations  to  the  Attorney  General  for  such  action 
as  he  may  deem  proper.  This  paragraph  was  accepted  by  the 
House. 

In  the  House  an  attempt  had  been  made  to  require  associa- 
tions desiring  to  benefit  by  this  act  to  secure  a  permit  from  the 
Federal  Trade  Commission;  and  to  authorize  the  Commission 
to  refuse  such  permits,  and  once  having  issued  them  to  cancel 
them  for  cause  after  a  hearing.  The  author  of  this  amendment 
took  the  position  that,  if  permits  were  required,  and  were  held 
subject  to  good  behavior,  administrative  supervision  would  be 
effective,  as  it  would  not  be  if  offenders  had  to  be  haled  into 
court.  The  objection  was  made  that  this  would  vest  a  dangerous 
power  in  the  Commission,  and  the  proposition  was  rejected  by 
a  vote  of  131-11.^ 

A  third  and  final  paragraph  gave  the  Commission  in  the  en- 
forcement of  these  provisions  all  the  powers,  where  applicable, 
1  Cong.  Record,  June  13,  1917,  pp.  3578,  3580,  3584. 


386        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

given  it    in    the   Trade    Commission   Act    of    September    26, 
1914. 

The  advantages  of  export  associations  have  been  stated.    We 
may  now  consider  some  of  the  possible  disadvantages. 

The  chief  objection  to  the  export  associations  authorized  by 
the  Webb  Act  is  that  they  may  be  used  as  a  means  of  restricting 
competition  in  the  domestic  market.  The  Federal  Trade  Com- 
mission recognized  this  danger,  but  expressed  the  opinion  that 
it  would  be  possible  through  administrative  supervision  to 
prevent  these  organizations  from  being  employed  in  this  fashion. 
Others,  however,  doubt  whether  this  is  possible.  If  all  the  con- 
cerns in  a  given  industry  are  associated  in  a  common  enterprise, 
they  will  tend  to  draw  together  and  to  pursue  a  harmonious 
policy  with  regard  to  domestic  business.  The  Gary  dinners  in 
the  steel  trade  were  a  remarkably  effective  device  in  maintaining 
a  policy  of  cooperation  that  was  equivalent  to  the  fixing  of 
prices.  These  dinners  were  illegal,  and  they  were  discontinued. 
However,  meetings  of  these  same  groups  through  the  medium 
of  an  export  association  are  not  illegal;  and  it  will  be  exceedingly 
difficult,  if  not  impossible,  to  prevent  some  understanding  being 
arrived  at  with  regard  to  domestic  prices  and  output.  This  is 
the  more  true,  since  the  export  associations  will  naturally  fix 
export  prices,  and  an  agreement  as  to  the  relationship  between 
export  and  domestic  prices  can  readily  be  effected.  Whether 
or  not  it  be  true,  as  alleged  by  the  minority  of  the  House  Com- 
mittee on  the  Judiciary,  that  the  Webb  legislation  was  sought 
"not  so  much  for  its  value  in  the  foreign  trade  as  for  the  effect 
it  would  have  on  the  domestic  trade,"  '  it  is  hardly  to  be  doubted 
that  a  restraint  of  domestic  trade  will  be  the  practical  result  in 
some,  if  not  numerous,  instances. 

A  second  possibility  is  that  the  Webb  Act  will  promote  inter- 
national combination.  Even  prior  to  the  enactment  of  this 
measure  there  had  been  international  combinations  in  steel 
rails,  gunpowder,  tobacco,  thread,  and  other  products,  the  under- 
lying purpose  of  these  combinations  being  the  maintenance  of 
an  undisputed  position  in  the  domestic  market.  So  far  as  the 
1  House  Report  no.  50,  65th  Cong.,  ist  sess. 


THE  WEBB-POMERENE  ACT  387 

United  States  is  concerned  these  arrangements  will  now  be 
legal,  since  such  restrictions  as  the  Sherman  Act  imposed  on 
restraints  of  foreign  trade  are  now  removed,  providing  the 
restraint  of  the  export  trade  does  not  restrain  trade  within  the 
United  States,  and  does  not  restrain  the  export  trade  of  a  do- 
mestic competitor  of  the  export  association.  It  is  also  to  be 
anticipated,  the  provisos  in  section  two  to  the  contrary  notwith- 
standing, that  the  effect  of  an  extension  of  international  com- 
bination will  be  to  reduce  the  effectiveness  of  foreign  competi- 
tion in  this  country,  that  is,  where  the  absence  of  a  protective 
tariff  has  permitted  such  competition  to  exist. 

Another  result  of  the  organization  of  export  combinations  in 
the  United  States  may  be  a  further  extension  of  foreign  combina- 
tions, in  order  that  foreign  buyers  may  be  in  a  position  to  bargain 
effectively  with  American  export  sales  agencies.  The  ultimate 
consequences  of  pitting  a  single  American  seller  against  a  single 
foreign  buyer  in  each  country,  if  it  should  come  to  that,  are  not 
easy  to  foresee,  yet  it  is  clear  that  there  exists  the  possibility 
of  prolonged  negotiations  during  the  pendency  of  which  the 
export  trade  will  greatly  suffer. 

Finally,  there  is  danger  lest  the  pursuit  of  trade  by  large 
groups  will  tend  to  upset  once  more  the  peace  of  the  world.  The 
House  Committee  on  the  Judiciary,  in  advocating  the  passage 
of  the  Webb  bill,  declared  that  export  trade,  by  virtue  of  the 
methods  adopted  by  other  leading  countries,  had  become 
"largely  a  matter  of  competition  between  nations."  ^  If  the 
Government  of  the  United  States  is  to  become  a  party  to  this 
international  rivalry  for  trade,  it  must  be  in  a  position  to  support 
its  foreign  trade  agencies  by  force  of  arms,  if  necessary,  with  con- 
sequences that  may  easily  be  foreseen  by  any  one  who  has 
learned  the  lessons  of  the  recent  war.  It  may  be,  however,  that 
it  is  not  necessary  for  us  to  run  these  risks,  particularly  in  view 
of  the  insistent  demand  abroad  for  American  products,  and  in 
view  of  the  immense  proportions  of  our  domestic  trade. 

^  House  Report  no.  ni8,  64th  Cong.,  ist  sess. 


CHAPTER  XVII 

JUDICIAL   INTERPRETATION   OF  THE 
SHERMAN   ACT 

We  come  now  to  the  interpretation  of  the  Sherman  Anti- 
trust Act  by  the  courts.  No  attempt  is  here  made  to  consider 
all  the  cases  involving  the  Sherman  Act  that  have  arisen  in  the 
courts;  only  the  leading  cases  that  are  significant  for  the  pur- 
poses of  this  book  are  treated.^  Generally  speaking,  reference 
is  made  only  to  the  decisions  of  the  Supreme  Court,  though  in 
two  instances — the  harvester  and  the  glucose  cases — the  deci- 
sions of  the  lower  courts  are  briefly  outlined. 

UNITED  STATES  V.  E.  C.  KNIGHT  COMPANY  ^ 

The  first  case  to  come  before  the  Supreme  Court  was  United 
States  V.  E.  C.  Knight  Company.  In  1892  the  American  Sugar 
Refining  Company,  producing  about  65  per  cent  of  all  the  sugar 
refined  in  the  United  States,  had  purchased  control  of  E.  C. 
Knight  Company  and  three  other  independent  sugar  refining 
companies,  producing  among  them  some  33  per  cent  of  the 
country's  output  of  refined  sugar.^  The  government  charged 
that  the  contracts  under  which  these  purchases  had  been  made 
constituted  combinations  in  restraint  of  trade;  and  it  brought 
suit  to  compel  their  cancellation.  Both  the  Circuit  Court  ^  and 
the  Circuit  Court  of  Appeals  '"  ordered  the  suit  dismissed.  There- 
upon an  appeal  was  taken  to  the  Supreme  Court. 

The  Supreme  Court  in  its  decision  rendered  on  January  21, 
1895,  sustained  the  lower  courts.    "The  fundamental  question," 

1  For  a  topical  analysis  of  the  leading  cases  that  have  arisen  under  the 
Sherman  Act,  see  the  report  of  the  Commissioner  of  Corporations  on  Trust 
Laws  and  Unfair  Competition,  pp.  70-123. 

"  156  U.  S.  1-46  (January  21,  1895).  ^60  Fed.  Rep.  306. 

^  See  p.  93.  *  Ibid.,  934. 

38§ 


JUDICIAL  INTERPRETATION  389 

said  the  Court,  "is,  whether  conceding  that  the  existence  of  a 
monopoly  in  manufacture  is  established  by  the  evidence,  that 
monopoly  can  be  directly  suppressed  under  the  act  of  Congress  in 
the  mode  attempted  by  this  bill."  The  argument  which  was 
advanced  by  the  government  was,  to  use  the  Court's  summary, 
that  "  the  power  to  control  the  manufacture  of  refined  sugar  is  a 
monopoly  over  a  necessary  of  life,  to  the  enjoyment  of  which  by 
a  large  part  of  the  population  of  the  United  States  interstate 
commerce  is  indispensable,  and  that,  therefore,  the  general 
government  in  the  exercise  of  the  power  to  regulate  commerce 
may  repress  such  monopoly  directly  and  set  aside  the  instru- 
ments which  have  created  it."  With  reference  to  this  argument 
the  Court  said:  "  Doubtless  the  power  to  control  the  manufacture 
of  a  given  thing  involves  in  a  certain  sense  the  control  of  its  dis- 
position, but  this  is  a  secondary  and  not  the  primary  sense;  and 
although  the  exercise  of  that  power  may  result  in  bringing  the 
operation  of  commerce  into  play,  it  does  not  control  it,  and 
affects  it  only  incidentally  and  indirectly.  Commerce  succeeds 
to  manufacture,  and  is  not  a  part  of  it.  The  power  to  regulate 
commerce  is  the  power  to  prescribe  the  rule  by  which  commerce 
shall  be  governed,  and  is  a  power  independent  of  the  power  to 
suppress  monopoly."  ^  And  by  the  act  of  July  2,  1890,  Congress 
did  not  attempt  "to  assert  the  power  to  deal  with  monopoly 
directly  as  such.  .  .  .  What  the  law  struck  at  was  combina- 
tions, contracts,  and  conspiracies  to  monopolize  trade  and  com- 
merce among  the  several  States  or  with  foreign  nations;  but  the 
contracts  and  acts  of  the  dejoidants  related  exclusively  to  the  acquisi- 
tion of  the  Philadelphia  refineries  and  the  business  of  sugar  refining 
in  Pennsylvania,  and  bore  no  direct  relation  to  commerce  between  the 
States  or  with  foreign  nations  ^  ....  It  is  true  that  the  bill 
alleged  that  the  products  of  these  refineries  were  sold  and  distrib- 
uted among  the  several  States,  and  that  all  the  companies  were 
engaged  in  trade  or  commerce  with  the  several  States  and  with 

1  However,  the  power  to  regulate  commerce  "may  operate  in  repression  of 
monopoly  whenever  that  comes  within  the  rules  by  which  corrmierce  is 
governed  or  whenever  the  transaction  is  itself  a  monopoly  of  commerce." 

2  Italics  supplied  by  the  author. 


390       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

foreign  nations;  but  this  was  no  more  than  to  say  that  trade  and 
commerce  served  manufacture  to  fulfil  its  function.  .  .  . 
There  was  nothing  in  the  proofs  to  hidicate  any  intention  to  put  a 
restraint  upon  trade  or  commerce,^  and  the  fact,  as  we  have  seen, 
that  trade  or  commerce  might  be  indirectly  affected  was  not 
enough  to  entitle  complainants  to  a  decree." 

A  vigorous  dissenting  opinion  was  rendered  by  Justice  Harlan, 
who  discussed  the  legal  aspects  of  the  case  fully.  With  respect  to 
the  economic  effects  of  the  decision,  he  held  that  freedom  of 
commercial  intercourse  embraces  the  right  to  buy  goods  to  be 
transported  from  one  state  to  another,  without  buyers  being 
burdened  by  unlawful  restraints  imposed  by  combinations  or 
corporations  or  individuals;  and  that  if  this  principle  were  not 
adhered  to,  "  interstate  traffic,  so  far  as  it  involves  the  price  to  be 
paid  for  articles  necessary  to  the  comfort  and  well-being  of  the 
people  in  all  the  States,  may  pass  under  the  absolute  control  of 
overshadowing  combinations  having  financial  resources  without 
limit  and  an  audacity  in  the  accomphshment  of  their  objects  that 
recognizes  none  of  the  restraints  of  moral  obligations  controlling 
the  action  of  individuals;  combinations  governed  entirely  by  the 
law  of  greed  and  selfishness — so  powerful  that  no  single  State  is 
able  to  overthrow  them  and  give  the  required  protection  to  the 
whole  country,  and  so  all-pervading  that  they  threaten  the 
integrity  of  our  institutions." 

He  then  went  on  to  inquire  (a  significant  inquiry  in  the  light  of 
the  subsequent  course  of  events)  how  the  people  of  the  United 
States  were  to  be  protected  against  combinations  to  fix  the  price 
of  flour,  grain,  oil,  salt,  cotton,  and  meat — should  such  be 
organized — except  by  a  national  power,  a  power  capable  of 
exerting  its  sovereign  authority  throughout  every  part  of  the 
territory,  and  over  all  the  people  of  the  nation. 

The  decision  of  the  Supreme  Court  in  the  Knight  case  ap- 
parently limited  greatly  the  power  of  the  federal  government  to 
deal  with  trusts  and  monopolies.  That  this  decision  stimulated 
the  formation  of  trusts  in  1897  as  soon  as  industrial  conditions 
made  their  organization  by  the  promoters  feasible — thus  realiz- 
1  Italics  supplied  by  the  author. 


JUDICIAL  INTERPRETATION  391 

ing  the  fears  of  Justice  Harlan — is  undoubted.  Yet  later  deci- 
sions by  the  Supreme  Court  have  shown  that  the  Sherman  Act  is 
by  no  means  as  ineffective  to  carry  out  the  purpose  for  which  it 
was  designed  as  the  decision  in  the  Knight  case  would  have  led 
one  to  suppose.  The  explanation,  in  part  at  least,  is  that  the 
Knight  case  was  not  properly  presented,  and  therefore  the  deci- 
sion of  the  Supreme  Court  in  this  case  did  not  bring  out  the  real 
scope  of  the  law.  What  the  Sherman  Act  declares  illegal  is  the 
restraint  and  monopoly  of  interstate  and  international  com- 
merce, but,  as  the  Supreme  Court  pointed  out,  there  was  nothing 
in  the  proofs  in  the  Knight  case  to  indicate  an  intention  to  put  a 
restraint  upon  trade  or  commerce.  It  is  hardly  necessary  to  say 
that  the  Supreme  Court  in  deciding  the  case  was  perforce  con- 
fined to  the  record  submitted.  If  the  record  was  inadequate, 
the  responsibility  for  the  failure  to  sustain  the  government  must 
be  laid  at  the  door  of  the  Attorney  General,  and  not  at  that  of 
the  Supreme  Court. 

UNITED  STATES  V.  TRANS-MISSOURI  FREIGHT  ASSOCIATION  ^ 

This  decision  is  important  in  that  it  estabHshed  that  the 
Sherman  Act  applied  to  all  contracts  in  restraint  of  trade,  in- 
cluding those  between  railroad  companies. 

On  March  15, 1889,  a  number  of  railway  companies,  engaged  in 
interstate  commerce,  formed  an  association,  known  as  the  Trans- 
Missouri  Freight  Association,  the  purpose  of  which  was  stated  to 
be  the  establishment  and  maintenance  of  reasonable  rates,  rules, 
and  regulations  on  interstate  freight  traffic  south  and  west  of  the 
Missouri  river.  The  Sherman  Act  was  subsequently  passed  on 
July  2,  1890,  but  the  association  maintained  its  existence  without 
change.  The  government  thereupon  brought  a  suit  in  equity  to 
have  the  association  dissolved. 

The  defendants  claimed  that  the  Sherman  Act  did  not  apply 
to  railroads,  and  that  even  if  it  did,  the  agreement  was  reason- 
able, and  therefore  not  illegal.  Neither  of  these  contentions, 
however,  was  sustained  by  the  Court.    With  respect  to  the  first 

1  166  U.  S.  290-374  (March  22,  1897). 


392        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

it  said,  "The  language  of  the  act  includes  every  ^  contract,  combi- 
nation in  the  form  of  trust  or  otherwise,  or  conspiracy,  in  re- 
straint of  trade  or  commerce  among  the  several  States  or  with 
foreign  nations."  It  therefore  covers  common  carriers  by  rail- 
road. In  addressing  itself  to  the  second  question  the  Court  asked 
the  meaning  of  the  language  in  the  statute  stating  that  "every 
contract,  combination  in  the  form  of  trust  or  otherwise,  or 
conspiracy,  in  restraint  of  trade  or  commerce  among  the  several 
States,  or  with  foreign  nations,  is  hereby  declared  to  be  illegal." 
The  defendants  argued  at  great  length  to  show  that  Congress 
meant  to  declare  illegal  only  those  contracts  that  were  in  un- 
reasonable restraint  of  trade.  They  pointed  out  that  the  common 
law  meaning  of  the  term  "contracts  in  restraint  of  trade"  in- 
cluded only  those  contracts  in  unreasonable  restraint  of  trade, 
and  that  terms  with  a  definite  meaning  at  common  law  should  be 
given  the  same  meaning  when  used  in  a  federal  statute.  "But," 
said  the  Court,  "  the  term  [contract  in  restraint  of  trade]  is  not  of 
such  Hmited  signification.  Contracts  in  restraint  of  trade  have 
been  known  and  spoken  of  for  hundreds  of  years  both  in  England 
and  in  this  country,  and  the  term  includes  all  kinds  of  those 
contracts  which  in  fact  restrain  or  may  restrain  trade.  Some  of 
such  contracts  have  been  held  void  and  unenforceable  in  the 
courts  by  reason  of  their  restraint  being  unreasonable,  while 
others  have  been  held  valid  because  they  were  not  of  that  nature. 
A  contract  may  be  in  restraint  of  trade  and  still  be  valid  at  com- 
mon law.  Although  valid,  it  is  nevertheless  a  contract  in  re- 
straint of  trade,  and  would  be  so  described  either  at  common  law 
or  elsewhere.  By  the  simple  use  of  the  term  '  contract  in  restraint 
of  trade,'  all  contracts  of  that  nature,  whether  valid  or  otherwise, 
would  be  included,  and  not  alone  that  kind  of  contract  which 
was  invalid  and  unenforceable  as  being  in  unreasonable  restraint 
of  trade." 

Again — the  matter  is  important  in  view  of  the  subsequent 

enunciation  of  the  "rule  of  reason" — "the  argvmients  which 

have  been  addressed  to  us  against  the  inclusion  of  all  contracts 

in  restraint  of  trade,  as  provided  for  by  the  language  of  the  act, 

1  The  italics  are  the  Court's. 


JUDICIAL  INTERPRETATION  393 

have  been  based  upon  the  alleged  presumption  that  Congress, 
notwithstanding  the  language  of  the  act,  could  not  have  intended 
to  embrace  all  contracts,  but  only  such  contracts  as  were  in  un- 
reasonable restraint  of  trade.  Under  these  circumstances  we 
are,  therefore,  asked  to  hold  that  the  act  of  Congress  excepts 
contracts  which  are  not  in  unreasonable  restraint  of  trade,  and 
which  only  keep  rates  up  to  a  reasonable  price,  notwithstanding 
the  language  of  the  act  makes  no  such  exception.  In  other 
words,  we  are  asked  to  read  into  the  act  by  way  of  judicial  legis- 
lation an  exception  that  is  not  placed  there  by  the  lawmaking 
branch  of  the  Government,  and  this  is  to  be  done  upon  the  theory 
that  the  impolicy  of  such  legislation  is  so  clear  that  it  cannot 
be  supposed  Congress  intended  the  natural  import  of  the  lan- 
guage it  used.  This  we  cannot  and  ought  not  to  do.  ...  If  the 
act  ought  to  read  as  contended  for  by  defendants.  Congress  is 
the  body  to  amend  it  and  not  this  court,  by  a  process  of  judicial 
legislation  wholly  unjustifiable."  The  Court  then  concluded 
that  the  "direct,  immediate  and  necessary  effect  [of  the  agree- 
ment] is  to  put  a  restraint  upon  trade  and  commerce  as  de- 
scribed in  the  act,"  and  it  is  therefore  illegal. 

A  vigorous  dissenting  opinion  was  rendered  by  Justice  White, 
and  concurred  in  by  Justices  Field,  Gray,  and  Shiras.  Said 
Justice  White,  "Is  it  correct  to  say  that  at  common  law  the 
words  'restraint  of  trade'  had  a  generic  signification  which 
embraced  all  contracts  which  restrained  the  freedom  of  trade, 
whether  reasonable  or  unreasonable,  and,  therefore,  that  all  such 
contracts  are  within  the  meaning  of  the  w^ords  '  every  contract  in 
restraint  of  trade'?  I  think  a  brief  consideration  of  the  history 
and  development  of  the  law  on  the  subject  will  not  only  establish 
the  inaccuracy  of  this  proposition,  but  also  demonstrate  that  the 
words  'restraint  of  trade'  embrace  only  contracts  which  un- 
reasonably restrain  trade,  and,  therefore,  that  reasonable  con- 
tracts, although  they,  in  some  measure,  'restrain  trade,'  are  not 
within  the  meaning  of  the  words." 

This  dissenting  opinion  is  important,  since  it  subsequently 
became  the  majority  opinion.  In  the  Standard  Oil  and  the 
Tobacco  cases  Justice  White  (then  Chief  Justice)  propounded 


394        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  "  rule  of  reason,"  and  established  the  principle  that  only 
contracts,  etc.,  in  unreasonable  restraint  of  trade  are  forbidden 
by  the  Sherman  Act. 

UNITED  STATES  V.  JOINT  TRAFFIC  ASSOCIATION  ^ 

This  case  grew  out  of  an  agreement  creating  an  association  to 
fix  rates  and  fares  on  competitive  interstate  trafhc  east  of  Chi- 
cago. The  agreement,  to  which  some  thirty  railroads  were  par- 
ties, expressly  declared  that  it  was  entered  into  only  to  estabhsh 
and  maintain  reasonable  rates,  fares,  rules,  and  regulations  on 
state  and  interstate  traffic,  and  that  the  powers  conferred  on 
the  managers  should  not  be  construed  to  permit  violation  of 
the  interstate  commerce  act  or  any  other  act  that  might  be 
apphcable.  The  government  instituted  a  suit  in  equity  to 
have  the  agreement  declared  void,  and  to  enjoin  its  execution. 

The  railroads  in  their  defense  argued  that  the  Joint  Traffic 
Association  was  fundamentally  different  in  nature  from  the 
Trans-Missouri  Freight  Association;  that  the  former  was  not  in 
restraint  of  trade  at  all,  and  was  not  therefore  affected  by  the 
decision  of  the  court  to  the  effect  that  all  restraints,  reasonable 
and  unreasonable,  were  illegal;  that  the  Sherman  Act,  as  it  had 
been  construed  in  the  Trans-Missouri  case,  was  unconstitutional; 
and  that  the  decision  in  the  Trans-Missouri  case  should  be  recon- 
sidered by  the  Court.  In  none  of  these  positions  were  they  sus- 
tained by  the  Supreme  Court.  The  Court  proceeded  at  consider- 
able length  to  state  the  interpretation  which  it  had  put  on  the 
Anti-trust  Act.  It  referred  to  its  decision  in  Hopkins  v.  United 
States,  rendered  on  the  same  day.-  "In  Hopkins  v.  United 
States  ...  we  say  that  the  statute  applies  only  to  those  con- 
tracts whose  direct  and  immediate  effect  is  a  restraint  upon 
interstate  commerce,  and  that  to  treat  the  act  as  condemning  all 
agreements  under  which,  as  a  result,  the  cost  of  conducting  an 
interstate  commercial  business  may  be  increased,  would  enlarge 
the  application  of  the  act  far  beyond  the  fair  meaning  of  the 
language  used.    The  effect  upon  interstate  commerce  must  not 

»  171  U.  S.  505-578  (October  24,  1898). 
2  171  U.  S.  578-604. 


JUDICIAL  INTERPRETATION  395 

be  indirect  or  incidental  only.  An  agreement  entered  into  for  the 
purpose  of  promoting  the  legitimate  business  of  an  individual  or 
corporation,  with  no  purpose  to  thereby  affect  or  restrain  inter- 
state commerce,  and  which  does  not  directly  restrain  such 
commerce,  is  not,  as  we  think,  covered  by  the  act,  although  the 
agreement  may  indirectly  and  remotely  aflfect  that  commerce. 
We  also  repeat  what  is  said  in  the  case  above  cited,  that '  the  act 
of  Congress  must  have  a  reasonable  construction,  or  else  there 
would  scarcely  be  an  agreement  or  contract  among  business  men 
that  could  not  be  said  to  have,  indirectly  or  remotely,  some 
bearing  upon  interstate  commerce,  and  possibly  to  restrain  it.' 
To  suppose,  as  is  assumed  by  counsel,  that  the  effect  of  the  deci- 
sion in  the  Trans-Missouri  case  is  to  render  illegal  most  business 
contracts  or  combinations,  however  indispensable  and  necessary 
they  may  be,  because,  as  they  assert,  they  all  restrain  trade  in 
some  remote  and  indirect  degree,  is  to  make  a  most  violent 
assumption  and  one  not  called  for  or  justified  by  the  decision 
mentioned,  or  by  any  other  decision  of  this  court."  ^ 

The  Court  went  on  to  say  that  the  natural,  direct,  and  imme- 
diate effect  of  competition  is  to  lower  rates,  and  thereby  to 
increase  the  demand  for  commodities,  the  supplying  of  which 
increases  commerce,  and  an  agreement,  whose  first  and  direct 
effect  is  to  prevent  this  play  of  competition,  restrains  instead  of 
promoting  trade  and  commerce.  Inasmuch  as  the  natural, 
direct,  and  necessary  effect  of  the  provisions  of  this  agreement 
was  to  prevent  any  competition  whatever  between  the  parties  to 
it  for  the  whole  time  of  its  existence,  it  was  illegal  and  void. 

From  this  opinion  Justices  White,  Gray,  and  Shiras  dissented, 
but  they  A\Tote  no  dissenting  opinion.  Justice  McKenna,  who 
had  succeeded  Justice  Field,  took  no  part  in  the  determination 
of  the  case.    The  decision,  therefore,  was  5-3. 

ADDYSTON  PIPE  AND  STEEL  COMPANY  V.  UNITED  STATES  ^ 

The  organization  and  nature  of  the  cast  iron  pipe  pool  (the 
Addyston  Pipe  and  Steel  Company)  has  already  been  described.^ 

1 17T  U.  S.  568.     ^  175  U.  S.  211-248  (December  4,  1899).     '  See  p.  12. 


396        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

The  government  instituted  proceedings  against  this  pool,  and 
requested  the  court  to  dissolve  it  and  perpetually  to  enjoin  its 
members  from  transporting  cast  iron  pipe  in  interstate  transpor- 
tation in  accordance  with  the  provisions  of  the  agreement.  The 
lower  court  dismissed  the  petition,  ^  but  was  reversed  by  the  Cir- 
cuit Court  of  Appeals.2  Thereupon  the  Addyston  Company 
appealed  to  the  Supreme  Court. 

The  defense  of  the  Addyston  Company  was  threefold:  first, 
that  the  power  of  Congress  to  regulate  interstate  commerce  did 
not  include  the  general  power  to  prohibit  private  contracts 
between  citizens,  even  though  such  contracts  resulted  in  a  direct 
and  substantial  obstruction  to  or  regulation  of  that  commerce; 
second,  that  even  if  the  combination  affected  interstate  com- 
merce, it  was  only  a  reasonable  restraint  upon  a  ruinous  competi- 
tion among  themselves;  and,  third,  that  the  agreement  had  no 
direct  relation  to  interstate  commerce. 

The  Supreme  Court,  in  an  unanimous  decision,  set  aside  all 
these  claims.  With  respect  to  the  first  it  held  that  Congress 
under  its  grant  of  power  to  regulate  interstate  commerce  "may 
enact  such  legislation  as  shall  declare  void  and  prohibit  the  per- 
formance of  any  contract  between  individuals  or  corporations 
where  the  natural  and  direct  effect  of  such  a  contract  will  be, 
when  carried  out,  to  directly,  and  not  as  a  mere  incident  to  other 
and  innocent  purposes,  regulate  to  any  substantial  extent  inter- 
state commerce.  .  .  .  We  do  not  assent  to  the  correctness  of  the 
proposition  that  the  constitutional  guaranty  of  liberty  to  the 
individual  to  enter  into  private  contracts  limits  the  power  of 
Congress  and  prevents  it  from  legislating  upon  the  subject  of 
contracts  of  the  class  mentioned.  ...  On  the  contrary,  we 
think  the  provision  regarding  the  liberty  of  the  citizen  is,  to 
some  extent,  limited  by  the  commerce  clause  of  the  Constitution, 
and  that  the  power  of  Congress  to  regulate  interstate  commerce 
comprises  the  right  to  enact  a  law  prohibiting  the  citizen  from 
entering  into  those  private  contracts  which  directly  and  sub- 
stantially,  and  not  merely  indirectly,   remotely,   incidentally 

1  78  Fed.  Rep.  712.  '85  Fed.  Rep.  271. 


JUDICIAL  INTERPRETATION  397 

and  collaterally,  regulate  to  a  greater  or  less  degree  commerce 
among  the  States." 

The  second  objection,  that  the  restraint  upon  interstate 
commerce,  if  any,  was  reasonable  received  scant  consideration 
at  the  hands  of  the  Court.  The  facts  as  set  forth  in  the  decision 
of  the  Circuit  Court  of  Appeals  "show  conclusively,"  it  said, 
"  that  the  effect  of  the  combination  was  to  enhance  prices  beyond 
a  sum  which  was  reasonable." 

With  regard  to  the  claim  of  the  defendants  that  the  combina- 
tion was  not  a  direct  restraint  on  interstate  commerce  the  Court 
said:  "the  direct  effect  of  the  agreement  or  combination  is  to 
regulate  interstate  commerce,  and  the  case  is  therefore  not 
covered  by  that  of  United  States  v.  E.  C.  Knight  Company, 
supra.  .  .  .  The  direct  purpose  of  the  combination  in  the  Knight 
case  was  the  control  of  the  manufacture  of  sugar.  There  was  no 
combination  or  agreement,  in  terms,  regarding  the  future  disposi- 
tion of  the  manufactured  article;  nothing  looking  to  a  transaction 
in  the  nature  of  interstate  commerce.  .  .  .  The  case  was  decided 
upon  the  principle  that  a  combination  simply  to  control  manu- 
facture was  not  a  violation  of  the  act  of  Congress,  because  such  a 
contract  or  combination  did  not  directly  control  or  affect 
interstate  commerce,  but  that  contracts  for  the  sale  and 
transportation  to  other  States  of  specific  articles  were  proper 
subjects  for  regulation  because  they  did  form  part  of  such 
commerce. 

"We  think  the  case  now  before  us  involves  contracts  of  the 
nature  last  above  mentioned,  not  incidentally  or  collaterally,  but 
as  a  direct  and  immediate  result  of  the  combination  engaged  in 
by  the  defendants." 

This  was  the  first  decision  of  the  Supreme  Court  since  the 
Knight  case  that  related  directly  to  an  industrial  combination. 
Though  it  came  too  late  to  prevent  the  establishment  of  numer- 
ous trusts  (the  trust  movement  had  already  reached  its  crest), 
nevertheless  it  strengthened  the  Sherman  Act,  and  increased  the 
power  of  the  government  to  deal  with  the  trusts  already  estab- 
lished. In  addition,  it  undoubtedly  restrained  somewhat  the 
further  creation  of  trusts,  though  it  did  not  discourage  their 


398        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

formation  entirely,  as  is  shown  by  the  fact  that  quite  a  number 
were  organized  even  after  the  rendering  of  this  decision. 

BEMENT  V.  NATIONAL  HARROW  COMPANY  ^ 

The  National  Harrow  Company  of  New  Jersey  owned  patents 
on  the  manufacture  of  "float  spring  tooth  harrows."  It  and 
Bement  had  entered  into  contracts  whereunder  Bement,  by 
observing  certain  conditions,  was  licensed  to  manufacture  and 
sell  these  implements.  The  conditions  were,  in  part,  that  Be- 
ment would  maintain  the  prices  fixed  in  the  license,  and  would 
not  engage  in  the  manufacture  of  any  other  type  of  float  spring 
tooth  harrow  than  that  which  he  was  authorized  to  manufacture. 
The  National  Harrow  Company  claimed  that  Bement  had 
violated  the  contract;  and  it  brought  suit  to  recover  damages, 
and  to  restrain  the  future  violation  thereof.  The  New  York 
Court  of  Appeals  awarded  damages,  whereupon  an  appeal  was 
taken  to  the  Supreme  Court  of  the  United  States. 

Bement  in  his  defense  argued  that  the  contracts  referred  to 
violated  the  Sherman  Act,  and  were  therefore  void.  This,  said 
the  Court,  would  be  a  good  defense,  if  true.  The  question  before 
the  Court  was,  therefore,  did  the  terms  of  the  Hcense  contracts 
violate  the  law?  In  endeavoring  to  answer  this  question  the 
Court  stated  that  the  most  material  fact  to  be  noted  was  that  the 
agreements  concerned  articles  protected  by  letters  patent.  The 
National  Harrow  Company  was  the  absolute  owner  of  the  letters 
patent  relating  to  the  float  spring  tooth  harrow  business.  "It 
was,  therefore,  the  owner  of  a  monopoly  recognized  by  the  Con- 
stitution and  by  the  statutes  of  Congress.  An  owner  of  a  patent 
has  the  right  to  sell  it  or  to  keep  it;  to  manufacture  the  article 
himself  or  to  license  others  to  manufacture  it;  to  sell  such  article 
himself  or  to  authorize  others  to  sell  it.  .  .  .  The  general  rule  is 
absolute  freedom  in  the  use  or  sale  of  rights  under  the  patent 
laws  of  the  United  States.  The  very  object  of  these  laws  is  mo- 
nopoly, and  the  rule  is,  with  few  exceptions,  that  any  conditions 
which  are  not  in  their  very  nature  illegal  with  regard  to  this  kind 

1 186  U.  S.  70-95  (May  19,  1902).    Justices  Harlan,  Gray,  and  White  did 
not  participate  in  this  decision. 


JUDICIAL  INTERPRETATION  399 

of  property,  imposed  by  the  patentee  and  agreed  to  by  the 
licensee  for  the  right  to  manufacture  or  use  or  sell  the  article,  will 
be  upheld  by  the  courts.  The  fact  that  the  conditions  in  the 
contracts  keep  up  the  monopoly  or  fix  prices  does  not  render 
them  illegal." 

The  contention  had  been  made  that  the  contracts  did  not 
affect  interstate  commerce.  But,  said  the  Court,  the  contracts 
plainly  looked  not  only  to  the  manufacture  of  these  harrows  in 
Michigan,  but  to  their  sale  throughout  the  United  States;  in  fact, 
they  determined  the  price  at  which  the  article  was  to  be  sold 
throughout  the  country.  Interstate  commerce  being  involved, 
were  the  contracts  illegal?  The  Court  answered  in  the  negative. 
"  It  is  true,"  it  said,  "  that  it  has  been  held  by  this  court  that  the 
act  included  any  restraint  of  commerce,  whether  reasonable  or 
unreasonable.  .  .  .  But  that  statute  clearly  does  not  refer  to 
that  kind  of  a  restraint  of  interstate  commerce  which  may  arise 
from  reasonable  and  legal  conditions  imposed  upon  the  assignee 
or  licensee  of  a  patent  by  the  owner  thereof,  restricting  the  terms 
upon  which  the  article  may  be  used  and  the  price  to  be  demanded 
therefor.  Such  a  construction  of  the  act  we  have  no  doubt  was 
never  contemplated  by  its  framers." 

The  Supreme  Court  threw  out  an  implication  that  its  decision 
might  have  been  different  were  it  established  that  there  was  a 
general  combination  among  the  dealers  in  patented  harrows  to 
regulate  the  sale  and  price  of  such  harrows.-^  Inasmuch,  how- 
ever, as  no  such  combination  had  been  established,  its  decision 
was  based  on  the  legality  of  the  specific  contracts  presented  to  it 
for  its  consideration. 

NORTHERN  SECURITIES  COMPANY  V.  UNITED  STATES  ^ 

The  Northern  Securities  Company  was  incorporated  in  New 
Jersey  in  November,  1901,  to  bring  under  a  common  control  the 
Northern  Pacific  Railway  and  the  Great  Northern  Railway, 
two  parallel  and  competing  lines  in  the  Northwest.  The  North- 
ern Securities  Company  was  to  be  a  holding  company;  and  it 
shortly  acquired,  by  giving  its  own  stock  in  exchange,  more  than 

1  Cf.  226  U.  S.  48.  2  ig,3  u.  S.  197-411  (March  14,  1904). 


400       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

nine-tenths  of  the  stock  of  the  Northern  Pacific  and  more  than 
three-fourths  of  the  stock  of  the  Great  Northern.  The  natural 
effect  of  this  arrangement  undoubtedly  would  have  been  to  end 
the  competition  between  these  two  railroads;  the  former  stock- 
holders in  the  two  roads,  as  common  stockliolders  in  the  holding 
company,  would  have  been  interested  in  preventing  competition, 
and  they  would  have  chosen  as  directors  men  who  would  carry 
out  their  wishes  in  this  matter.  The  government,  therefore, 
instituted  a  suit  in  equity  (March  lo,  1902)  to  have  the  North- 
ern Securities  Company  dissolved  as  a  combination  in  restraint 
of  interstate  commerce,  and  the  railway  stocks  held  by  it  re- 
turned. It  charged  that  if  this  combination  were  not  declared 
illegal,  the  efforts  of  the  national  government  to  preserve  to  the 
people  the  benefits  of  free  competition  among  interstate  railways 
would  prove  unavailing;  in  fact,  that  all  the  railroads  of  the 
country  might  be  consolidated  into  one  system. 

The  Supreme  Court  by  a  vote  of  5  to  4  sustained  the  decree 
of  the  lower  court  ordering  the  Northern  Securities  Company 
dissolved.^  It  said,  "No  scheme  or  device  could  more  certainly 
come  within  the  words  of  the  act — '  combination  in  the  form  of  a 
trust  or  otherwise  ...  in  restraint  of  commerce  among  the 
several  States  or  with  foreign  nation/ — or  could  more  effec- 
tively and  certainly  suppress  free  competition  between  the 
constituent  companies.  This  combination  is,  within  the  mean- 
ing of  the  act,  a  'trust';  but  if  not,  it  is  a  combination  in  restraint 
of  interstate  and  international  commerce;  and  that  is  enough  to 
bring  it  under  the  condemnation  of  the  act." 

The  Court  in  this  connection  took  occasion  to  summarize  the 
earher  cases  arising  under  the  anti-trust  act  which  had  received 
consideration  at  its  hands.  It  pointed  out  that  from  these 
earUer  decisions  certain  propositions  bearing  on  the  present 
case  were  plainly  deducible.  These  propositions,  stating  in  a 
nutshell  the  meaning  of  the  Sherman  Act  as  interpreted  up  to 
that  time,  were: 

"That  although  the  act  of  Congress  known  as  the  Anti-Trust 

1  The  minority  filed  a  Ions  dissenting  opinion,  written  in  part  by  Justice 
White  and  in  part  by  Justice  Holmes.    193  U.  S.  364-411. 


JUDICIAL  INTERPRETATION  401 

Act  has  no  reference  to  the  mere  manufacture  or  production  of 
articles  or  commodities  within  the  Hmits  of  the  several  States, 
it  does  embrace  and  declare  to  be  illegal  every  contract,  com- 
bination or  conspiracy,  in  whatever  form,  of  whatever  nature, 
and  whoever  may  be  parties  to  it,  which  directly  or  necessarily 
operates  in  restraint  of  trade  or  commerce  among  the  several 
States  or  with  foreign  nations; 

"  That  the  act  is  not  limited  to  restraints  of  interstate  and 
international  trade  or  commerce  that  are  unreasonable  in  their 
nature,  but  embraces  all  direct  restraints  imposed  by  any  combi- 
nation, conspiracy  or  monopoly  upon  such  trade  or  commerce; 

"  That  railroad  carriers  engaged  in  interstate  or  international 
trade  or  commerce  are  embraced  by  the  act; 

"That  combinations  even  among  private  manufacturers  or 
dealers  whereby  interstate  or  international  commerce  is  restrained 
are  equally  embraced  by  the  act; 

"  That  Congress  has  the  power  to  establish  rules  by  which 
interstate  and  international  commerce  shall  be  governed,  and, 
by  the  Anti-Trust  Act,  has  prescribed  the  rule  of  free  competi- 
tion among  those  engaged  in  such  commerce; 

"  That  every  combination  or  conspiracy  which  would  extinguish 
competition  between  otherwise  competing  railroads  engaged  in 
interstate  trade  or  commerce,  and  which  would  in  that  way  re- 
strain such  trade  or  commerce,  is  made  illegal  by  the  act; 

"  That  the  natural  effect  of  competition  is  to  increase  com- 
merce, and  an  agreement  whose  direct  effect  is  to  prevent  this 
play  of  competition  restrains  instead  of  promotes  trade  and 
commerce; 

"  That  to  vitiate  a  combination,  such  as  the  act  of  Congress 
condemns,  it  need  not  be  shown  that  the  combination,  in  fact, 
results  or  will  result  in  a  total  suppression  of  trade  or  in  a  com- 
plete monopoly,  but  it  is  only  essential  to  show  that  by  its 
necessary  operation  it  tends  to  restrain  interstate  or  interna- 
tional trade  or  commerce  or  tends  to  create  a  monopoly  in  such 
trade  or  commerce  and  to  deprive  the  public  of  the  advantages 
that  flow  from  free  competition; 

"  That  the  constitutional  guarantee  of  Uberty  of  contract  does 


402        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

not  prevent  Congress  from  prescribing  the  rule  of  free  competi- 
tion for  those  engaged  in  interstate  and  international  commerce. "  ^ 
The  recognition  of  these  principles,  said  the  Court,  must  lead 
us  to  grant  the  relief  asked  for  by  the  government  unless  the 
special  objections  raised  by  the  defendants  to  the  application  of 
the  Sherman  Act  to  the  present  case  are  substantial.  These 
objections  in  part  were:  the  Northern  Securities  Company  was 
a  state  corporation  authorized  to  acquire  stock,  and  the  enforce- 
ment of  the  Sherman  Act  against  it  would  be  an  unauthorized 
interference  by  the  national  government  with  the  internal  com- 
merce of  the  states  creating  it  and  its  subsidiary  railway  com- 
panies; that  so  far  as  the  power  of  Congress  was  concerned, 
citizens  or  state  corporations  might  dispose  of  theif  property 
and  invest  their  money  in  any  way  they  chose;  and  that  the 
enforcement  of  the  act  would  lead  to  business  disaster,  and 
widespread  financial  ruin.  All  these  objections  were  considered 
and  dismissed  by  the  Court.  The  Anti-trust  Act,  it  said,  has 
been  construed  as  forbidding  any  combination  which  by  its 
necessary  operation  destroys  or  restricts  free  competition  among 
those  engaged  in  interstate  commerce;  in  other  words,  that  to 
destroy  or  restrict  free  competition  in  interstate  commerce  was 
to  restrain  such  commerce.  Simply  because  a  state  allows  con- 
solidation, it  does  not  follow  that  the  stockholders  of  two  or 
more  state  railroad  corporations,  having  competing  lines  and 
engaged  in  interstate  commerce,  could  lawfully  combine  and 
form  a  distinct  corporation  to  hold  the  stock  of  the  constituent 
corporations,  and,  by  destroying  competition  between  them,  in 
violation  of  the  act  of  Congress,  restrain  commerce  among  the 
states  and  with  foreign  nations.  "No  State  can,  by  merely 
creating  a  corporation,  or  in  any  other  mode,  project  its  author- 
ity into  other  States,  and  across  the  continent,  so  as  to  prevent 
Congress  from  exerting  the  power  it  possesses  under  the  Con- 
stitution over  interstate  and  international  commerce,  or  so  as  to 
exempt  its  corporation  engaged  in  interstate  commerce  from 
obedience  to  any  rule  lawfully  established  by  Congress  for  such 
commerce.  .  .  .  Every  corporation  created  by  a  State  is  nec- 
1 193  U.  S.  331-332.    Italics  are  the  Court's. 


JUDICIAL  INTERPRETATION  403 

essarily  subject  to  the  supreme  law  of  the  land;  ..."  and  "the 
court  may  make  any  order  necessary  to  bring  about  the  dis- 
solution or  suppression  of  an  illegal  combination  that  restrains 
interstate  commerce.  ..."  The  affirmance  of  the  judgment 
below  will  mean  that  no  device,  "however  skilfully  such  device 
may  have  been  contrived,  and  no  combination,  by  whomsoever 
formed,  is  beyond  the  reach  of  the  supreme  law  of  the  land,  if 
such  device  or  combination  by  its  operation  directly  restrains 
commerce  among  the  States  or  with  foreign  nations  in  violation 
of  the  act  of  Congress." 

The  Supreme  Court  therefore  sustained  the  decree  of  the  lower 
court. .  The  Northern  Securities  Company  was  enjoined  from 
voting  the  stock  of  the  Northern  Pacific  Railway  Company  and 
the  Great  Northern  Railway  Company,  and  the  railroad  com- 
panies were  enjoined  from  paying  any  dividends  on  such  stock 
to  the  Northern  Securities  Company.  But  the  Northern  Securi- 
ties Company  might  return  to  the  Northern  Pacific  and  the 
Great  Northern,  respectively,  the  stock  of  these  roads  held  by 
it;  or  it  might  transfer  the  stocks  of  these  railroad  companies 
to  its  own  shareholders.^ 

This  decision  was  of  capital  importance  in  the  interpretation 
of  the  Sherman  Act,  since  it  was  the  first  instance  in  which  a 
holding  company  was  attacked  as  a  combination  in  restraint  of 
trade.  But  it  was  of  equal  importance  in  its  influence  upon 
economic  conditions.  It  gave  a  decided  set-back  to  the  use  of 
the  holding  company  device  in  the  organization  of  trusts;  and  it 
greatly  encouraged  the  federal  government  in  instituting  pro- 
ceedings against  them. 

SWIFT  AND  COMPANY  V.  UNITED  STATES  ^ 

This  was  a  bill  in  equity  against  Swift  and  Company,  Armour 
and  Company,  Cudahy  Packing  Company,  Nelson  Morris  and 
Company,   Schwarzchild  and   Sulzberger,  Hammond  Packing 

1  For  a  later  decision  of  the  Supreme  Court  approving  the  plan  of  dissolu- 
tion agreed  upon,  see  Harriman  v.  Northern  Securities  Company,  197  U.  S. 
244-299. 

2 196  U.  S.  375-402  (January  30,  1905), 


404        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Company,  and  G.  H.  Hammond  Company,  controlling  about 
60  per  cent  of  the  total  trade  in  fresh  meats.  ^  The  bill  charged  a 
combination  of  a  dominant  proportion  of  the  packers  throughout 
the  United  States  not  to  bid  against  each  other  in  the  live  stock 
markets  of  the  dififerent  states,  except  perfunctorily  and  with- 
out good  faith,  thus  securing  the  live  stock  at  less  than  com- 
petitive prices;  a  combination  to  bid  up  prices  for  a  few  days  in 
order  to  induce  the  cattle  men  to  send  their  stock  to  the  stock- 
yards; to  fix  the  prices  at  which  they  would  sell  to  dealers 
throughout  the  states,  these  prices  being  effected  by  secret 
periodical  meetings  and  maintained  by  a  restriction  of  ship- 
ments, by  the  establishment  of  a  uniform  rule  for  the  giving  of 
credit,  and  by  the  keeping  of  a  black  list  of  delinquents;  a  com- 
bination to  make  uniform  and  improper  charges  for  cartage; 
and,  finally,  to  get  less  than  lawful  rates  from  the  railroads  to 
the  exclusion  of  shippers.  It  was  further  charged  that  because 
of  the  consequent  inability  of  competitors  to  continue  in  com- 
merce, the  defendants  had  monopolized  the  commerce  in  live 
stock  and  fresh  meats  among  the  states.  The  government 
prayed  for  an  injunction  of  the  most  comprehensive  sort.  The 
Circuit  Court  upheld  the  government;  and  issued  an  injunction 
restraining  the  defendants  from  entering  into  a  combination, 
in  violation  of  the  Sherman  Act,  and  from  employing  any  of  the 
aforesaid  devices,  or  any  other  method  or  device,  the  purpose 
or  effect  of  which  was  to  restrain  commerce.-  The  defendants 
thereupon  appealed  to  the  Supreme  Court,  but  mthout  success. 
The  Court  unanimously  held  that  an  illegal  combination  had 
been  shown;  and  that  the  effect  of  the  combination  on  inter- 
state commerce  was  direct,  and  not  accidental,  secondary,  or 
remote.  The  case  was  to  be  distinguished  from  United  States 
V.  E.  C.  Knight  Company.  In  the  Knight  case  the  subject- 
matter  of  the  combination  was  manufacture,  and  the  direct 
object  was  monopoly  within  a  state.  However  likely  it  was  that 
monopoly  of  commerce  among  the  states  in  sugar  would  follow 
from  the  agreement  entered  into,  such  was  not  a  necessary 

'  Petition  in  United  States  v.  Swift  and  Company,  pp.  i,  4. 
2  The  injunction  is  quoted  in  196  U.  S.  393. 


JUDICIAL  INTERPRETATION  405 

consequence,  nor  a  primary  end.  But  in  this  case  the  subject- 
matter  was  sales,  and  the  very  point  of  the  combination  was  to 
restrain  and  monopoHze  commerce  among  the  states  in  respect 
of  such  sales.  The  Supreme  Court  therefore  affirmed  the  injunc- 
tion, except  that  it  ordered  the  elimination  therefrom  of  the 
words  "or  by  any  other  method  or  device,  the  purpose  and 
effect  of  which  is  to  restrain  commerce  as  aforesaid."  The 
specific  devices  mentioned  in  the  bill  stood  prohibited,  but  the 
Court  felt  that  it  would  be  quite  unjust  to  issue  a  general  in- 
junction against  all  possible  breaches  of  the  law,  since  that 
would  put  the  whole  conduct  of  the  defendant's  business  at  the 
peril  of  a  summons  for  contempt. 

LOEWE  V.  LAWLOR  ^ 

Mr.  Loewe,  a  manufacturer  of  hats  at  Danbury,  Connecticut, 
and  engaged  in  interstate  commerce  in  the  sale  of  his  hats, 
operated  an  open  shop.  The  United  Hatters  of  North  America,  a 
labor  organization,  forming  a  part  of  the  American  Federation 
of  Labor,  demanded  that  Mr.  Loewe  employ  union  labor  ex- 
clusively, that  is,  convert  his  plant  into  a  closed  shop.  Upon 
his  refusal  the  United  Hatters  went  on  strike,  and  instituted  a 
boycott  against  the  hats  manufactured  by  Mr.  Loewe.  Finding 
it  difficult  to  dispose  of  his  product  in  interstate  commerce,  Mr. 
Loewe  brought  an  action  against  Mr.  Lawlor  and  the  United 
Hatters  of  North  America  for  the  recovery  of  three-fold  damages 
under  section  seven  of  the  Sherman  Act. 

The  question  before  the  Court  was  whether  upon  the  facts 
averred  and  admitted  an  action  could  be  maintained.  The 
Court  in  an  unanimous  decision  held  that  it  could.  The  Sher- 
man Act,  it  said,  "prohibits  any  combination  whatever  to  secure 
action  which  essentially  obstructs  the  free  flow  of  commerce 
between  the  States,  or  restricts,  in  that  regard,  the  liberty  of  a 
trader  to  engage  in  business,"  and  the  combination  described 
was  in  restraint  of  trade  or  commerce  among  the  several  states 
in  the  sense  in  which  those  words  were  used  in  the  act.    The 

^  208  U.  S.  274-309  (February  3,  1908). 


4o6       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Supreme  Court  therefore  remanded  the  cause  to  the  lower 
court  to  determine  the  truth  of  the  facts  alleged  and  the  amount 
of  the  damages  to  be  awarded. 

THE    STANDARD    OIL    COMPANY    OF    NEW    JERSEY    ET    AL.    V.    THE 
UNITED  STATES  ^ 

The  government  brought  suit  on  November  15,  1906,  against 
the  Standard  Oil  Company  of  New  Jersey  (the  holding  com- 
pany), seventy  subsidiary  corporations,  and  seven  individual 
defendants,  charging  violation  of  the  Sherman  Act.  The 
Circuit  Court  in  an  unanimous  decision  on  November  20, 
1909,  held  that  the  Standard  Oil  Company  was  a  combination  in 
restraint  of  trade  in  violation  of  section  one  and  a  monopoly 
in  violation  of  section  two  of  the  anti-trust  act,  but  it  ordered 
the  bill  against  thirty-three  of  the  corporate  defendants  dis- 
missed, since  it  had  not  been  proven  that  they  were  engaged  in 
the  operation  of  the  combination.  The  Circuit  Court  thereupon 
issued  a  decree,-  which  provided  (substantially  in  the  Court's 
language) : 

Section  5.  That  the  Standard  Oil  Company,  its  directors, 
officers,  agents,  servants,  and  employees,  are  enjoined  from 
voting  any  of  the  stock  in  any  of  the  thirty-seven  companies 
named  in  section  two  of  the  decree,  and  from  exercising  or 
attempting  to  exercise  any  control  or  influence  over  the  acts 
of  these  subsidiary  companies  by  virtue  of  its  holding  of  their 
stock.  And  the  subsidiary  companies,  their  officers,  etc.,  are 
enjoined  from  paying  any  dividends  to  the  Standard  Oil  Com- 
pany of  New  Jersey,  and  from  permitting  the  latter  to  vote  any 
stock  in,  or  direct  the  policy  of  any  of  them.  "But  the  defend- 
ants are  not  prohibited  by  this  decree  from  distribnting  ratably 
to  the  shareholders  of  the  principal  company  the  shares  to  which 
they  are  equitably  entitled  in  the  stocks  of  the  defendant  cor- 
porations that  are  parties  to  the  combination."  ^ 

Section  6.  That  the  defendants  named  in  section  two  of  the 
decree,  their  officers,  etc.,  are  enjoined  from  continuing  the  com- 

1  221  U.  S.  1-106  (May  15,  1911).  ^  173  Fed.  Rep.  197-200. 

'  Italics  supplied  by  the  author. 


JUDICIAL  INTERPRETATION  407 

bination  adjudged  illegal,  and  from  entering  into  any  like  com- 
bination or  conspiracy,  the  effect  of  which  is,  or  will  be,  to  re- 
strain commerce  in  petroleum  or  its  products  among  the  States, 
etc.,  or  to  prolong  the  unlawful  monopoly  of  such  commerce 
possessed  by  defendants,  either  (i)  by  the  use  of  liquidating 
certificates;  by  placing  the  control  of  any  of  said  corporations 
in  a  trustee;  by  causing  its  stock  or  property  to  be  held  by  others 
than  its  equitable  owners;  or  by  any  similar  de\dce;  or  (2)  by 
making  any  express  or  implied  agreement  together,  like  that 
adjudged  illegal,  relative  to  the  control  or  management  of  any 
of  said  corporations,  or  the  price  or  terms  of  purchase,  or  of 
sale,  or  the  rates  of  transportation,  of  petroleum  or  its  products 
in  interstate  or  international  commerce,  or  relative  to  the  quan- 
tities thereof  purchased,  sold,  transported,  or  manufactured 
by  any  of  said  corporations,  which  will  have  a  like  effect  in 
restraint  of  conmierce  to  that  of  the  combination  the  operation 
of  which  is  hereby  enjoined. 

Section  7.  The  defendants  named  in  section  two  are  enjoined, 
until  the  discontinuance  of  the  operation  of  the  illegal  combina- 
tion, from  engaging  in  interstate  commerce. 

Section  9.  This  decree  shall  take  effect  thirty  days  after  its 
entry  if  no  appeal  is  taken  from  it;  and  if  an  appeal  is  taken,  it 
shall  take  effect,  unless  reversed  or  modified,  within  thirty  days 
after  the  final  decision  of  the  Supreme  Court  upon  appeal. 

The  Standard  Oil  Company  of  New  Jersey,  thirty-three  of 
the  thirty-seven  other  corporate  defendants,  and  the  seven  in- 
dividual defendants  at  once  appealed  to  the  Supreme  Court. 
The  case  was  argued  before  the  Court  in  March,  19 10,  but  on 
account  of  the  illness  of  Justice  Moody,  and  the  death  of  Jus- 
tice Brewer  in  the  latter  part  of  March,  the  case  was  reargued 
in  January,  191 1.  The  decision  of  the  Court  was  rendered  on 
May  15,  1911. 

The  Supreme  Court  in  approaching  the  problem  raised  by 
the  case  pointed  out  that  the  views  of  the  two  parties  to  the 
suit  as  to  the  meaning  of  the  Sherman  Act  and  as  to  the  facts 
were  as  "wide  apart  as  the  poles."  But  since  both  agreed  that 
the  controversy  in  its  every  aspect  was  controlled  by  a  correct 


4o8        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

conception  of  the  meaning  of  sections  one  and  two  of  the  Sher- 
man Act,  the  Court  proposed  to  consider  first  of  all  the  text 
of  these  sections  of  the  act,  and  its  meaning  in  the  light  of  the 
common  law  and  the  law  of  the  country  at  the  time  of  its 
adoption. 

The  first  section  of  the  Sherman  Act  deals  with  restraint  of 
trade,  and  the  second  with  attempts  to  monopolize,  and  monopo- 
lization.   The  Court,  guided  by  the  principle  that  words  which 
had  a  well-known  meaning  at  common  law  or  in  the  law  of  this 
country  were  presumed  to  have  been  used  in  that  sense  in  a 
statute  unless  the  context  compelled  to  the  contrary,  reviewed 
briefly  certain  indisputable  propositions  already  established  by 
the  English  and  American  law  prior  to  the  enactment  of  the 
Sherman  Act.    It  then  concluded  with  respect  to  the  first  sec- 
tion: That  the  context  manifests  that  the  statute  was  drawn 
in  the  light  of  the  existing  practical  conception  of  the  law  of 
restraint  of  trade;  that  in  view  of  the  many  new  forms  of  con- 
tracts and  combinations  which  were  being  evolved  from  exist- 
ing economic  conditions  it  was  deemed  essential  by  an  all- 
embracing  enumeration  to  make  sure  that  no  form  of  contract 
or  combination  by  which  an  undue  restraint  of  interstate  or 
foreign  commerce  was  brought  about  could  save  such  restraint 
from  condemnation;  that  the  statute  under  this  view  evidenced 
the  intent  not  to  restrain  the  right  to  make  contracts,  whether 
resulting  from  combination  or  otherwise,  which  did  not  unduly 
restrain  interstate  or  foreign  commerce;  that  as  the  contracts 
or  acts  embraced  in  the  provision  were  not  expressly  defined, 
it  inevitably  followed  that  the  provision  necessarily  called  for 
the  exercise  of  judgment,  which  required  that  some  standard 
should  be  resorted  to  for  the  purpose  of  determining  whether 
the  prohibitions  contained  in  the  statute  had  or  had  not  in  any 
given  case  been  violated;  that,  thus  not  specifying,  but  indubit- 
ably contemplating  and  requiring  a  standard,  it  was  intended 
that  the  standard  of  reason  ^  which  had  been  applied  at  the  com- 
mon law  and  in  this  country  in  dealing  Vv'ith  subjects  of  the 
character  embraced  by  the  statute,  was  intended  to  be  the 
'  Italics  supplied  by  the  author. 


JUDICIAL  INTERPRETATION  469 

measure  used  for  the  purpose  of  determining  whether  in  a  given 
case  a  particular  act  had  or  had  not  brought  about  the  wrong 
against  which  the  statute  provided. 

With  respect  to  the  second  section  a  consideration  of  the  text 
served  to  estabUsh,  said  the  Court,  that  this  section  was  intended 
to  supplement  the  first,  and  to  make  sure  that  by  no  possible 
guise  could  the  public  policy  embodied  in  the  first  section  be 
frustrated  or  evaded.  The  words  "  to  monopolize"  reach  every 
act  bringing  about  the  prohibited  results.  The  ambiguity,  if 
any,  is  involved  in  determining  what  is  intended  by  monopolize. 
But  this  ambiguity  is  readily  dispelled,  said  the  Court,  in  the 
light  of  the  previous  history  of  the  law  of  restraint  of  trade  to 
which  we  have  referred,  and  the  indication  which  it  gives  of  the 
practical  evolution  by  which  monopoly  and  the  acts  which  pro- 
duce the  same  result  as  monopoly,  that  is,  an  undue  restraint 
of  the  course  of  trade,  all  came  to  be  spoken  of  as  restraint  of 
trade.  In  other  words,  having  by  the  first  section  forbidden  all 
means  of  monopolizing  trade,  that  is,  unduly  restraining  it  by 
means  of  every  contract,  combination,  etc.,  the  second  section 
seeks,  if  possible,  to  make  the  prohibitions  of  the  act  all  the  more 
complete  and  perfect  by  embracing  all  attempts  to  reach  the 
end  prohibited  by  the  first  section,  that  is,  restraints  of  trade, 
by  any  attempt  to  monopolize,  even  though  the  acts  by  which 
such  results  are  attempted  to  be  brought  about  be  not  embraced 
within  the  general  enumeration  of  the  first  section.  And,  of 
course,  when  the  second  section  is  thus  harmonized  with  and 
made,  as  it  was  intended  to  be,  the  complement  of  the  first, 
it  becomes  obvious  that  the  criterion  to  be  resorted  to  in  any 
given  case  for  the  purpose  of  ascertaining  whether  violations  of 
the  section  have  been  committed,  is  the  rule  of  reason  ^  guided 
by  the  established  law  and  by  the  plain  duty  to  enforce  the  pro- 
hibitions of  the  act,  and  thus  the  public  policy  which  its  restric- 
tions were  obviously  enacted  to  subserve. 

While  the  meaning  of  sections  one  and  two  thus  seemed  clear 
to  the  Court,  it  proposed,  before  applying  its  interpretation,  to 
consider  the  contentions  of  the  plaintiff  and  defendants,  which 
1  Italics  supplied  by  the  author. 


4io        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

would  give  a  different  significance  to  the  act  than  that  adopted 
by  the  Court. 

The  fundamental  contention  of  the  government  was  that  the 
language  of  the  statute  embraced  every  contract,  combination, 
etc.,  in  restraint  of  trade,  and  hence  left  no  room  for  judgment. 
It  held  further  that  this  was  the  interpretation  that  had  been 
placed  upon  the  act  by  the  Court,  notably  in  the  freight  associa- 
tion cases.  In  reply  the  Court  said  that  it  was  undoubtedly 
true  that  in  the  opinion  in  each  of  the  freight  association  cases 
general  language  was  made  use  of,  which,  when  separated  from 
its  context,  would  justify  the  conclusion  that  it  was  decided 
that  reason  could  not  be  resorted  to  for  the  purpose  of  determin- 
ing whether  the  acts  complained  of  were  within  the  statute.  Yet 
it  was  also  true  that  the  nature  and  character  of  the  contract 
or  agreement  in  each  case  was  fully  referred  to,  and  suggestions 
as  to  their  unreasonableness  pointed  out,  in  order  to  indicate 
that  they  were  within  the  prohibitions  of  the  statute.  That  the 
cases  rehed  upon  did  not,  when  rightly  construed,  sustain  the 
doctrine  contended  for  was  established,  it  held,  by  all  of  the 
numerous  decisions  of  this  court  which  have  applied  and  en- 
forced the  anti-trust  act,  since  they  all  in  the  very  nature  of 
things  rest  upon  the  premise  that  reason  was  the  guide  by  which 
the  provisions  of  the  act  were  in  every  case  interpreted.  Indeed 
in  Hopkins  v.  United  States,  decided  after  the  Trans-Missouri 
Freight  Association  case,  but  before  the  Joint  Traffic  Associa- 
tion case,  the  Court  said,  "to  treat  as  condemned  by  the  act  all 
agreements  under  which,  as  a  result,  the  cost  of  conducting  an 
interstate  commercial  business  may  be  increased  would  enlarge 
the  application  of  the  act  far  beyond  the  fair  meaning  of  the 
language  used.  There  must  be  some  direct  and  immediate 
effect  upon  interstate  commerce  in  order  to  come  within  the 
act."  And  "if  the  criterion  by  which  it  is  to  be  determined  in 
all  cases  whether  every  contract,  combination,  etc.,  is  a  restraint 
of  trade  within  the  intendment  of  the  law,  is  the  direct  or  indirect 
effect  of  the  acts  involved,  then  of  course  the  rule  of  reason  be- 
comes the  guide,  and  the  construction  which  we  have  given  the 
statute,  instead  of  being  refuted  by  the  cases  relied  upon,  is  by 


JUDICIAL  INTERPRETATION  41 1 

those  cases  demonstrated  to  be  correct."  In  other  words,  the 
rule  of  reason  and  the  result  of  the  test  as  to  direct  and  indirect 
in  their  ultimate  aspect  come  to  one  and  the  same  thing.  But 
"in  order  not  in  the  slightest  degree  to  be  wanting  in  frankness, 
we  say  that  in  so  far,  however,  as  by  separating  the  general 
language  used  in  the  opinions  in  the  Freight  Association  and  Joint 
Traffic  cases  from  the  context  and  the  subject  and  parties  with 
which  the  cases  were  concerned,  it  ma}'-  be  conceived  that  the 
language  referred  to  conflicts  with  the  construction  which  we 
give  the  statute,  they  are  necessarily  now  limited  and  qualified."  ^ 

The  contentions  of  the  defendants  were  fundamentally: 
first,  that  the  act  could  not  be  constitutionally  applied  to  the 
case  before  the  court,  since  this  would  result  in  extending  the 
power  of  Congress  over  mere  questions  of  production  within 
the  states;  and,  second,  that  the  act  could  not  be  applied  without 
impairing  rights  of  property  and  destroying  the  freedom  of  con- 
tract or  trade,  which  were  protected  by  the  constitutional 
guaranty  of  due  process  of  law.  The  first  contention,  said  the 
Court,  is  foreclosed  by  the  numerous  decisions  since  the  Knight 
case;  and  the  second  assumes  that  reason  may  not  be  resorted 
to  in  applying  the  statute,  and  that  therefore  the  right  to  con- 
tract is  unreasonably  restricted.  But  since  we  have  pointed  out 
that  reason  may  be  resorted  to,  the  proposition  based  on  an  un- 
sound assumption  falls  to  the  ground. 

The  meaning  of  the  Sherman  Act  having  been  set  forth,  what 
was  the  status  under  this  act  of  the  Standard  Oil  Company? 
The  established  facts,  said  the  Court,  demonstrate  the  illegahty 
of  the  combination  before  us;  the  Standard  Oil  Company  is  not 
only  a  combination  in  restraint  of  trade,  but  a  combination  in 
unreasonable  restraint  of  trade.  It  turned  next,  therefore,  to 
a  consideration  of  the  remedy  to  be  applied. 

Ordinarily,  said  the  Court,  adequate  relief  .against  acts  done 
in  violation  of  the  statute  would  result  from  restraining  the  doing 
of  such  acts  in  the  future.  But  in  a  case  like  this  where  there 
exists  not  only  a  continued  attempt  to  monopolize,  but  also  a 
monopolization,  the  duty  to  enforce  the  statute  requires  the 
^  221  U.  S.  67-68. 


412        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

application  of  broader  remedies.  The  essential  remedies  are: 
first,  to  forbid  the  doing  in  the  future  of  acts  violative  of  the 
statute;  and,  second,  the  exertion  of  such  measure  of  relief  as 
will  effectually  dissolve  the  illegal  combination.  The  Court 
then  proceeded  as  a  means  of  determining  the  relief  to  be  granted 
to  consider  the  relief  afforded  by  the  Circuit  Court.  The  decree 
of  the  Circuit  Court  is  given  on  page  406,  and  need  not  be 
repeated  here.  The  Supreme  Court  affirmed  this  decree  of  the 
lower  court  except  in  certain  particulars.  It  held,  first,  that  the 
interests  involved  were  so  vast  that  the  defendants  should  be 
allowed  sbc  months  to  carry  out  the  decree,  instead  of  only 
thirty  days.  Second,  it  thought  that  section  seven  of  the  decree, 
forbidding  interstate  commerce  to  the  New  Jersey  corporation 
and  its  subsidiary  companies  until  the  dissolution  of  the  com- 
bination, might  work  serious  injury  to  the  public,  and  should 
not  have  been  awarded.  And,  finally,  the  Supreme  Court 
construed  section  six  of  the  decree  as  restraining  the  stockholders 
or  the  corporations,  after  the  dissolution  of  the  combination, 
from,  by  any  device  whatever,  recreating,  directly  or  indirectly, 
the  illegal  combination,  but  not  as  depriving  them  of  the  power 
to  make  normal  and  lawful  contracts  or  agreements.  For  ex- 
ample, after  the  dissolution  some  of  the  separate  pipe-line  com- 
panies might  desire  to  combine  so  as  to  form  a  continuous  fine. 
Such  action,  the  Court  held,  would  not  be  repugnant  to  the  act, 
yet  it  might  be  deemed  to  have  been  restrained  by  the  decree  of 
the  court  below.  Section  six  was  therefore  modified  to  permit 
such  lawful  arrangements.  As  thus  modified  the  decree  was 
aflarmed,  and  the  court  below  was  allowed  to  retain  jurisdiction 
to  the  extent  necessary  to  compel  compUance  in  every  respect 
with  its  decree.^ 

The  decision  that  the  Standard  Oil  Company  was  unlawful 
was  a  unanimous  one,  but  Justice  Harlan  filed  a  separate  opin- 
ion dissenting  from  certain  parts  of  the  decision,  particularly  the 
enunciation  of  the  "rule  of  reason."    Relentlessly  he  cited  from 

iThe  decree  of  the  Circuit  Court,  modified  to  meet  the  views  of  the 
Supreme  Court,  was  filed  July  29,  191 1;  and  may  be  found  in  Decrees 
and  Judgments  in  Federal  Anti-Trust  Cases,  pp.  136-144. 


JUDICIAL  INTERPRETATION  4x3 

former  decisions  of  the  Court,  particularly  the  Trans-Missouri 
Freight  case  and  the  Joint  Traffic  case,  passages  indicating  that 
the  Court  had  substantially  modified  its  former  position.  ^  The 
Court,  said  Justice  Harlan,  now  says  to  those  who  object  to 
all  legislative  prohibition  of  contracts,  combinations,  and  trusts 
in  restraint  of  interstate  commerce,  "you  may  now  restrain  such 
commerce,  provided  you  are  reasonable  about  it;  only  take  care 
that  the  restraint  is  not  undue."  "  As  the  result  of  this  upsetting 
of  the  long-settled  interpretation  of  the  act  we  \\dll  doubtless 
have,  he  said,  in  cases  without  nimiber,  the  constantly  recurring 
inquiry — difficuU  to  solve  by  proof  ^ — whether  the  particular  con- 
tract, combination,  or  trust  involved  in  each  case  is  or  is  not  an 
"unreasonable"  or  "undue"  restraint  of  trade.  But  more 
dangerous  in  his  opinion  was  the  fact  that  the  decision  of  the 
Court  in  this  case  represented  judicial  legislation, — a  usurpation 
of  the  constitutional  functions  of  the  legislative  branch  of  the 
government.  Justice  Harlan  held  that  the  Court  had  done  in 
this  case  exactly  what  in  the  Trans-Missouri  Freight  case  it  had 
refused  to  do;  that  in  the  Trans-Missouri  Freight  case  the  Court 
had  held  that  the  act  prohibited  every  contract,  etc.,  in  restraint 
of  trade,  and  that  to  read  into  the  act  the  word  "unreasonable" 
would  be  an  act  of  judicial  legislation;  and  this  they  could  not 
and  ought  not  to  do.  The  Supreme  Court,  therefore,  by 
interpretation  of  a  statute  has  changed,  he  said,  the  public  policy 
adopted  by  Congress, — a  proceeding  that  might  well  cause 
some  alarm  for  the  integrity  of  our  institutions.^ 

UNITED     STATES    V.     AMERICAN    TOBACCO    COMPANY;    AMERICAN 


TOBACCO  COMPANY  V.  UNITED  STATES 


The  suit  against  the  tobacco  trust  was  brought  on  July  10, 
1907.    The  defendants  were  twenty-nine  individuals,  sixty-five 

^  In  speaking  of  the  Standard  Oil  and  the  Tobacco  cases  Judge  Peter 
Grosscup  said,  "It  would  be  mere  hypocrisy  to  say  that  the  court  has  not 
turned  upon  itself.  What  the  court  fourteen  years  ago  said  was  not  in  the 
act  the  court  now  say  is  in  the  act."    (North  American  Review,  194,  p.  3.) 

^  Italics  are  Justice  Harlan's.  *  221  U.  S.  83,  105. 

'Italics  supplied  by  the  author.  ^  Ibid.,  106-193  (May  29,  1911.) 


414       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

American  corporations,  and  two  English  corporations.  Fol 
convenience  the  corporate  defendants  were  classified  by  the 
upper  court  as  follows:  the  American  Tobacco  Company  (a 
corporation  organized  in  New  Jersey  in  1904  to  merge  the  prop- 
erties formerly  controlled  through  the  Consolidated  Tobacco 
Company,  a  holding  company)  was  called  the  primary  defend- 
ant; the  American  Snuff  Company,  the  American  Cigar  Com- 
pany, the  American  Stogie  Company,  the  MacAndrews  and 
Forbes  Company,  and  the  Conley  Foil  Company  were  called  the 
accessory  defendants;  the  remaining  fifty-nine  American  cor- 
porations, the  subsidiary  defendants;  and  the  Imperial  Tobacco 
Company  and  the  British- American  Tobacco  Company,  the 
English  corporations.  The  bill  charged  that  the  defendants, 
individual  and  corporate,  constituted  a  combination  in  restraint 
of  interstate  and  foreign  trade  in  tobacco  in  violation  of  section 
one  of  the  Sherman  Act,  and  a  monopolization  of  such  trade  in 
violation  of  section  two.  The  decision  of  the  Circuit  Court, 
rendered  on  November  7,  1908,  was  favorable  to  the  government, 
though  one  of  the  four  judges  dissented.^  The  decree  of  the 
Court  was  filed  on  December  15,  1908.^  Inasmuch  as  the  Su- 
preme Court  in  subsequently  awarding  its  decree  did  not  model 
its  action  upon  that  of  the  Circuit  Court,  the  decree  of  the  lower 
court  need  not  be  outlined  here.  It  suffices  to  say  that  the  Cir- 
cuit Court  dismissed  the  petition  as  to  the  individual  defendants, 
the  English  corporations,  the  United  Cigar  Stores  Company,  and 
three  other  of  the  subsidiary  corporations,  but  granted  relief 
with  respect  to  the  remaining  defendants.  From  the  decree  both 
parties  appealed  to  the  Supreme  Court,  the  government  because 
the  petition  had  been  dismissed  in  part  and  because  the  decree 
awarded  did  not  satisfy  it,  and  the  defendants  because  the  peti- 
tion had  not  been  dismissed  as  to  all  of  the  defendants.  The 
decision  of  the  Supreme  Court  was  rendered  on  May  29,  191 1, 
the  pronouncement  being  delayed  by  the  same  causes  that  made 
a  reargument  of  the  Standard  Oil  case  advisable. 

The  Supreme  Court  found  its  task  much  simplified  by  the 
analysis  and  review  of  the  act  made  in  the  Standard  Oil  case. 

'  164  Fed.  Rep.  7cx>-728.  2  164  Fed.  Rep.  1024-1025. 


JUDICIAL  INTERPRETATION  415 

Its  investigation  in  the  tobacco  case  proceeded  along  three  lines: 
first,  a  review  of  the  undisputed  facts;  second,  the  construction 
and  application  of  the  act;  and,  third,  the  remedy  to  be  applied. 
The  facts  as  to  the  tobacco  trust  are  found  in  Chapter  VII, 
and  we  may  therefore  proceed  at  once  to  the  second  branch 
of  the  Court's  inquiry,  the  interpretation  of  the  Sherman 
Act. 

The  Court  pointed  out  first  of  all  the  significance  of  the  case 
before  it.  It  said,  "If  the  Anti-trust  Act  is  applicable  to  the 
entire  situation  here  presented  and  is  adequate  to  afford  com- 
plete relief  for  the  evils  which  the  United  States  insists  that 
situation  presents  it  can  only  be  because  that  law  will  be  given  a 
more  comprehensive  application  than  has  been  affixed  to  it  in  any 
previous  decision.  This  will  be  the  case  because  the  undisputed 
facts  as  we  have  stated  them  involve  questions  as  to  the  opera- 
tion of  the  Anti-trust  Act  not  hitherto  presented  in  any  case." 
It  then  pointed  out  why  this  was  so.  Even  if  the  ownership  of 
stock  by  the  American  Tobacco  Company  in  the  accessory  and 
subsidiary  companies  and  the  ownership  of  stock  in  any  of  these 
companies  among  themselves  were  held,  as  in  the  Standard  Oil 
case,  to  be  a  violation  of  the  act,  the  question  would  remain 
whether  the  American  Tobacco  Company,  and  the  five  accessory 
defendants,  by  virtue  of  the  power  that  remained  to  them,  would 
still  be  in  existence  in  violation  of  the  Sherman  Act.  Again,  the 
question  would  remain  whether  those  companies  whose  power 
arose,  not  from  combination,  but  from  the  acquisition  and  owner- 
ship of  property,  were  amenable  to  the  prohibitions  of  the  act. 
Further,  the  question  would  remain  whether  certain  companies 
no  longer  in  themselves  a  restraint  of  trade  or  a  monopolization, 
when  once  they  had  been  bereft  of  the  power  resulting  from 
stock  ownership,  should  nevertheless  be  restrained  because  of 
their  intimate  connection  with  other  defendants. 

The  Court  then  proceeded  to  apply  the  act  as  formerly  inter- 
preted to  the  case  before  it.  By  the  interpretation  which  we 
have  put  on  the  act,  said  the  Court,  all  the  difficulties  suggested 
by  the  form  in  which  the  assailed  transactions  are  clothed  be- 
come of  no  moment.    This  follows  because  the  first  and  second 


4l6        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

sections  of  the  Sherman  law,  when  taken  together,  embrace  every 
conceivable  act  which  could  possibly  come  within  the  spirit  or 
purpose  of  the  prohibitions  of  the  law,  without  regard  to  the  garb 
in  which  such  acts  are  clothed;  that  is  to  say,  the  public  pohcy 
which  that  statute  manifests  can  not  be  frustrated  by  resort  to 
any  disguise  or  subterfuge  of  form. 

Considering,  then,  the  undisputed  facts,  it  only  remains,  said 
the  Court,  to  determine  whether  they  establish  that  the  acts, 
contracts,  agreements,  and  combinations  which  were  assailed 
were  of  such  a  wrongful  character  as  to  bring  them  within  the 
prohibitions  of  the  law.  That  they  were,  the  undisputed  facts 
made  abundantly  clear.  The  wrongful  purpose  and  the  illegality 
of  the  tobacco  combination  is  overwhehiiingly  established,  said 
by  the  Court,  by  the  following  considerations:  a.  By  the  fact 
that  the  very  first  organization  or  combination  was  mipelled  by  a 
previously  existing  fierce  trade  war,  evidently  inspired  by  one  or 
more  of  the  minds  which  brought  about  and  became  parties  to 
that  combination,  b.  Because,  immediately  after  that  combina- 
tion, the  acts  which  ensued  justify  the  inference  that  the  inten- 
tion existed  to  use  the  power  of  the  combination  as  a  vantage 
ground  to  further  monopolize  the  trade  in  tobacco  by  means  of 
trade  conflicts  designed  to  injure  others,  either  by  driving  com- 
petitors out  of  the  business  or  compelling  them  to  become  parties 
to  a  combination — a  purjiose  whose  execution  was  illustrated  by 
the  plug  war,  by  the  snuff  war,  and  by  the  conflict  which  imme- 
diately followed  the  entry  of  the  combination  into  England  and 
the  division  of  the  world's  business  by  the  two  foreign  contracts 
which  ensued,  c.  By  the  ever-present  manifestation  which  is 
exhibited  of  a  conscious  wTongdoing  by  the  form  in  which  the 
various  transactions  were  embodied  from  the  beginning,  ever 
changing  but  ever  in  substance  the  same.  d.  By  the  gradual 
absorption  of  control  over  all  the  elements  essential  to  the 
successful  manufacture  of  tobacco  products,  and  by  placing  such 
control  in  the  hands  of  seemingly  independent  corporations 
serving  as  perpetual  barriers  to  the  entry  of  others  into  the 
tobacco  trade,  e.  By  persistent  ex]3enditure  of  millions  upon 
millions  of  dollars  in  buying  out  plants,  not  for  the  purpose  of 


JUDICIAL  INTERPRETATION  417 

utilizing  them,  but  in  order  to  close  them  up  and  render  them 
useless  for  the  purposes  of  trade,  f.  By  the  constantly  recurring 
stipulations,  by  which  numbers  of  persons,  whether  manufac- 
turers, stockholders,  or  employees,  were  required  to  bind  them- 
selves, generally  for  long  periods,  not  to  compete  in  the  future. 
"  Indeed,  when  the  results  of  the  undisputed  proof  which  we  have 
stated  are  fully  apprehended,  and  the  wrongful  acts  which  they 
exhibit  are  considered,  there  comes  ine\itably  to  the  mind  the 
conviction  that  it  was  the  danger  which  it  was  deemed  would 
arise  to  indi\ddual  liberty  and  the  pubHc  well-being  from  acts 
like  those  which  this  record  exhibits,  which  led  the  legislative 
mind  to  conceive  and  to  enact  the  Anti-trust  Act,  considerations 
which  also  serve  to  clearly  demonstrate  that  the  combination 
here  assailed  is  within  the  law  as  to  leave  no  doubt  that  it  is  our 
plain  duty  to  apply  its  prohibitions." 

The  application  of  remedies  involves  greater  difficulties, 
held  the  Court,  than  any  case  interpreting  the  Anti-trust  Act 
hitherto  decided.  This  is  true,  first,  because  a  mere  decree  for- 
bidding stock  ownership  by  one  part  of  the  combination  in 
another  part  would  not  afford  adequate  relief,  since  there  would 
still  remain  different  ingredients  of  the  combination,  still  able, 
by  the  character  of  their  organization,  to  continue  the  WTongful 
situation.  Second,  because  the  subtle  devices  resorted  to  were  of 
such  a  character  as  to  make  it  difficult,  if  not  impossible,  to 
restore  in  their  entirety  the  original  lawful  conditions.  Third, 
because  the  affair  was  so  involved  that  there  was  danger  of 
injuring  the  public,  and  possibly  of  perpetuating  the  illegal 
condition.  The  Court  said  that  it  might  at  once  issue  a  perma- 
nent injunction  restraining  the  combination  as  a  universality 
and  all  the  individuals  and  corporations  which  formed  a  part  of 
it  from  continuing  to  engage  in  interstate  commerce  until  the 
illegal  situation  was  cured,  or  it  might  direct  the  appointment 
of  a  receiver  to  take  charge  of  the  assets  of  the  combination  to 
prevent  a  continued  violation  of  the  law,  and  to  work  out  by  a 
sale  of  the  property  of  the  combination  a  condition  not  repug- 
nant to  the  act.  But  it  did  not  order  either  of  these  remedies. 
To  stay  the  interstate  transportation  by  defendants  of  tobacco 


41 8        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

and  its  products  might  inflict  infinite  injury  on  the  public  by 
leading  to  the  stoppage  of  supply  and  a  great  enhancement  of 
prices;  and  the  resort  to  a  receivership  might  not  only  do  grievous 
injury  to  the  public,  but  also  cause  widespread  loss  to  many 
innocent  people.  It,  therefore,  having  held  that  the  petition 
should  not  have  been  dismissed  against  the  individual  defend- 
ants, the  United  Cigar  Stores  Company,  and  the  foreign  corpora- 
tions, decreed  as  follows:  (i)  That  the  combination  in  and  of  it- 
self, as  well  as  each  and  all  of  the  elements  composing  it,  whether 
corporate  or  individual,  whether  considered  collectively  or 
separately,  be  decreed  to  be  in  restraint  of  trade  and  an  attempt 
to  monopolize  and  a  monopolization.  (2)  That  the  court  below, 
in  order  to  give  effective  force  to  our  decree,  be  directed  to  hear 
the  parties  for  the  purpose  of  determining  upon  some  plan  of 
dissolving  the  combination  and  of  recreating,  out  of  the  elements 
now  composing  it,  a  new  condition  which  shall  be  honestly  in 
harmony  with  and  not  repugnant  to  the  law.  (3)  That  for  the 
accomplishment  of  these  purposes  a  period  of  six  months  is 
allowed,  with  leave,  however,  to  the  court  below  to  extend  such 
period  to  a  further  time  not  to  exceed  sixty  days.  (4)  That  in  the 
event,  before  the  expiration  of  the  period  thus  fixed,  a  condition 
of  disintegration  in  harmony  with  the  law  is  not  brought  about, 
it  shall  be  the  duty  of  the  court,  either  by  way  of  an  injunction 
restraining  the  movement  of  the  products  of  the  combination  in 
the  channels  of  interstate  or  foreign  commerce  or  by  the  appoint- 
ment of  a  receiver,  to  give  effect  to  the  requirements  of  the  stat- 
ute. Meanwhile  the  defendants  should  be  restrained  from  doing 
any  act  which  might  enlarge  the  power  of  the  combination.^ 

Justice  Harlan,  as  in  the  Standard  Oil  case,  assented  in  part 
and  dissented  in  part.  He  agreed  most  thoroughly  that  the 
American  Tobacco  Company  and  its  parts  should  be  decreed  to 
be  in  restraint  of  interstate  trade  and  a  monopolization.  But  he 
objected  to  sending  the  case  back  to  the  Circuit  Court  in  order 
that  a  new  condition  might  be  "recreated"  that  would  not  be  in 
violation  of  the  law;  there  was  enough  evidence  in  the  record, 
he  said,  to  enable  the  Supreme  Court  to  formulate  specific  direc- 
^  For  an  account  of  the  final  plan  of  dissolution,  see  pp.  452  seq. 


JUDICIAL  INTERPRETATION  419 

tions  as  to  what  the  decree  should  contain.  He  objected  also  to 
the  reaffirmance  of  the  "rule  of  reason."  "Congress,  with  full 
and  exclusive  power  over  the  whole  subject,  has  signified  its 
purpose  to  forbid  every  restraint  of  interstate  trade,  in  whatever 
form,  or  to  whatever  extent,  but  the  court  has  assumed  to  insert 
in  the  act,  by  construction  merely,  words  which  make  Congress 
say  that  it  means  only  to  prohibit  the  '  undue '  restraint  of  trade. 
If  I  do  not  misapprehend  the  opinion  just  deUvered,  the  court 
insists  that  what  was  said  in  the  opinion  in  the  Standard  Oil  Case, 
was  in  accordance  with  our  previous  decisions  in  the  Trans- 
Missouri  and  Joiui  Traffic  cases,  ...  if  we  resort  to  reason. 
This  statement  surprises  me  quite  as  much  as  would  a  statement 
that  black  was  white  or  white  was  black.  .  .  .  By  every  con- 
ceivable form  of  expression,  the  majority,  in  the  Trans-Missouri 
and  Joint  Traffic  cases,  adjudged  that  the  act  of  Congress  did 
not  allow  restraint  of  interstate  trade  to  any  extent  or  in  any 
form,  and  three  times  it  expressly  rejected  the  theory,  which  had 
been  persistently  advanced,  that  the  act  should  be  construed  as 
if  it  had  in  it  the  word  'unreasonable'  or  'undue.'  But  now  the 
court,  in  accordance  with  what  it  denominates  the  'rule  of 
reason,'  in  effect  inserts  in  the  act  the  word  'undue,'  which  means 
the  same  as  'unreasonable,'  and  thereby  makes  Congress  say 
what  it  did  not  say,  what,  as  I  think,  it  plainly  did  not  intend  to 
say  and  what,  since  the  passage  of  the  act,  it  has  explicitly  re- 
fused to  say.  It  has  steadily  refused  to  amend  the  act  so  as  to 
tolerate  a  restraint  of  interstate  commerce  even  where  such 
restraint  could  be  said  to  be  'reasonable'  or  'due.'  In  short, 
the  court  now,  by  judicial  legislation,  in  effect  amends  an  act 
of  Congress  relating  to  a  subject  over  which  that  department 
of  the  Government  has  exclusive  cognizance." 

HEISTRY  V.  A.  B.  DICK  COMPANY  ^ 

The  facts  in  this  case  were  briefly  as  follows:  The  A.  B.  Dick 
Company  owned  the  patent  on  a  stencil-duplicating  machine 

1  224  U.  S.  1-73  (March  11,  1912).  This  case  was  decided  under  the  patent 
law  rather  than  under  the  anti-trust  law,  but  its  bearing  on  the  trust  problem 
is  sufficient  to  justify  its  inclusion, 


420        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

known  as  the  "Rotary  Mimeograph."  The  company  sold  one 
of  these  machines  to  a  Miss  Skou  under  a  hcense  restriction 
attached  to  the  machine,  which  stated  that  the  machine  was 
sold  by  the  Dick  Company  with  the  license  restriction  that  it 
might  be  used  only  with  the  stencil  paper,  ink,  and  other  supplies 
made  by  the  Dick  Company.  The  defendant,  Sidney  Henry,  a 
dealer  in  ink,  sold  to  Miss  Skou  for  use  on  the  machine  a  can  of 
ink  not  made  by  the  Dick  Company;  and  this  with  knowledge  of 
the  license  restriction  and  with  the  expectation  that  it  would  be 
used  in  connection  with  the  mimeograph.  The  Dick  Company 
brought  suit  against  Henry,  alleging  that  the  patent  on  the 
mimeograph  had  been  infringed  by  the  breach  of  the  conditions 
upon  which  the  patented  machine  was  sold;  and  sought  an 
injunction  against  indirect  infringement  by  Henry. 

The  Court  rendered  a  judgment  in  favor  of  the  Dick  Com- 
pany. The  patent  laws,  the  Court  pointed  out,  grant  to  the 
inventor  the  exclusive  right  to  make,  use,  and  sell  the  invention; 
and  each  of  these  is  a  separable  right.  Thus,  one  person  may  be 
permitted  to  make,  but  not  to  sell  or  use,  the  patented  article. 
Another  may  be  permitted  to  sell,  but  within  a  limited  area,  or 
for  a  particular  use.  A  third  may  be  permitted  only  to  use  the 
patented  article.  While  an  absolute  and  unconditional  sale  of  a 
patented  article  operates  to  place  it  beyond  the  boundaries  of  the 
patent,  and  thus  places  the  purchaser  in  possession  of  the  article 
to  do  with  as  he  pleases,  the  owner  of  the  patent,  under  his  right 
to  exclusive  use  of  the  patented  article,  may  pass  the  property 
right  to  a  purchaser  under  license  restrictions  which  will  give  him 
the  right  to  use  the  machine  only  for  specified  purposes  or  at 
specified  places.  This  is  because  a  patent  monopoly  gives  the  sep- 
arate rights  of  manufacture,  sale,  and  use.  When,  therefore,  a 
patentee  makes  and  sells  a  patented  device,  the  exi-ant  of  the  li- 
cense to  use,  which  is  carried  by  the  sale,  depends  on  whether  any 
restriction  was  placed  on  its  use,  and  brought  home  to  the  person 
acquiring  the  article.  The  Court  held  that  it  was  clear  from  the 
license  restriction  adopted  in  this  case  that  while  the  property  in 
the  machine  passed  to  the  purchaser,  the  sale  carried  with  it  only 
the  right  to  use  the  invention  according  to  the  terms  of  the 


JUDICIAL  INTERPRETATION  42 1 

license;  and  among  these  terms  was  the  use  of  ink  made  by  the 
Dick  Company. 

The  Court  then  turned  to  an  examination  of  the  nature  of 
the  restrictions  that  might  be  lawfully  imposed  on  a  purchaser 
of  a  patented  article.  It  declared  that  it  would  construe  the 
patent  law  as  granting  a  monopoly  in  order  to  subserve  a  broad 
public  policy, — the  encouragement  of  invention.  It  referred 
with  approval  to  the  Bement  case.^  In  that  case  it  was  held  that 
a  contract  in  regard  to  the  use  of  a  patent,  even  though  it  re- 
strained interstate  trade,  did  not  fall  within  the  prohibitions  of 
the  Sherman  Act,  if  it  involved  only  the  reasonable  and  legal 
conditions  imposed  under  the  patent  law.  But,  it  was  argued,  to 
permit  the  seller  to  restrict  the  buyer  to  a  use  of  the  mimeograph- 
ing machine  in  connection  with  ink  made  by  the  patentee  would 
give  the  latter  the  power  to  extend  his  monopoly  so  as  to  embrace 
articles  not  within  the  patent.  To  cite  one  of  the  suggestions 
pressed  upon  the  Court,  it  was  said  that  a  patentee  of  a  coffee  pot 
might  sell  on  the  condition  that  the  pot  be  used  only  with  coffee 
bought  from  him.  While  granting  that  competition  in  the  sale  of 
ink,  coffee,  etc.,  might  be  slightly  affected  by  such  restrictions, 
the  Court  held  that  these  illustrations  failed  to  show  marked 
inconvenience  to  the  public,  since  the  public  was  always  free  to 
take  or  refuse  the  patented  article  on  the  terms  imposed.  If  the 
terms  were  too  onerous,  the  patented  article  would  not  find  a 
market;  and  the  public,  by  permitting  the  invention  to  go  un- 
used, lost  nothing  which  it  had  before.  When  the  patent  expired 
the  public  would  be  permitted  to  use  the  invention  without 
compensation  or  restriction.  "  It  must  not  be  forgotten,"  said 
the  Court,  "  that  we  are  dealing  with  a  constitutional  and  statu- 
tory monopoly.  .  .  .  We  are  not  at  liberty  to  say  that  the 
Constitution  has  unwisely  provided  for  granting  a  monopolistic 
right  to  inventors,  or  that  Congress  has  um\isely  failed  to  impose 
limitations  upon  the  inventor's  exclusive  right  of  use.  And 
if  it  be  that  the  ingenuity  of  patentees  in  devising  ways  in  which 
to  reap  the  benefit  of  their  discoveries  requires  to  be  restrained, 
Congress  alone  has  the  power  to  determine  what  restraints  shall 

1  See  p.  398. 


422        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

be  imposed."  (In  1914,  as  a  part  of  the  anti-trust  legislation  of 
that  year,  Congress  acted  upon  this  suggestion;  and  in  section 
three  of  the  Clayton  Act  specifically  forbade  such  restrictive  sales 
as  the  Supreme  Court  had  upheld  in  the  Dick  case).  ^ 

From  the  opinion  in  the  Dick  case  Chief  Justice  White  and 
Justices  Hughes  and  Lamar  dissented.  Inasmuch  as  the  case  was 
argued  after  the  death  of  Justice  Harlan  and  during  the  absence 
of  Justice  Day,  the  decision  was  4  to  3. 

Subsequently — after  the  passage  of  the  Clayton  Act — the 
Supreme  Court  in  the  Motion  Picture  Patents  Company  case 
said:  "  Under  the  patent  law  the  grant  by  patent  of  the  exclusive 
right  to  use,  like  the  grant  of  the  exclusive  right  to  vend,  is 
limited  to  the  invention  described  in  the  claims  of  the  patent, 
and  that  law  does  not  empower  the  patent  owner  by  notices 
attached  to  the  things  patented  to  extend  the  scope  of  the  patent 
monopoly  by  restricting  their  use  to  materials  necessary  for  their 
operation  but  forming  no  part  of  the  patented  invention,  or  to 
send  such  articles  forth  into  the  channels  of  trade  subject  to 
conditions  as  to  use  or  royalty,  to  be  imposed  thereafter,  in  the 
vendor's  discretion."  "  By  this  decision  Henry  v.  Dick  was 
definitely  overruled. 

UNITED  STATES  V.  ST.  LOUIS  TERMINAL  ASSOCIATION  ^ 

This  case  is  significant  since  it  illustrates  the  "  advantages  " 
that  may  result  from  the  adoption  of  the  Court's  "rule  of 
reason."  It  was  the  first  case  in  which  the  Court  held  that  a 
combination  which  was  illegal  because  in  unreasonable  restraint 
of  trade  might,  by  a  modification  of  its  provisions,  become  a 
lawful  combination.  The  decision  was  unanimous,  although 
Justice  Holmes  did  not  participate  in  the  hearing  of  the  case. 

The  geographical  and  topographical  conditions  at  St.  Louis 
are  unusual.  On  the  east  lies  the  Mississippi  river,  which  con- 
stitutes quite  an  obstacle  to  railroad  communications.  The 
cost  of  constructing  a  bridge  over  the  river  is  so  great  that  the 
railroads  have  not  endeavored  to  build  their  own  bridges,  but 

1  Cf.  p.  361.  2  243  U.  S.  502  (April  9, 1917). 

3  224  U.  S.  383-413  (April  22,  1912). 


JUDICIAL  INTERPRETATION  423 

each  has  made  use  of  a  toll  bridge, — open  to  all  railroads.  From 
the  west  access  to  the  city  is  almost  as  difficult.  The  city  is 
located  on  hills  which  approach  close  to  the  river  bank,  and  it 
was  found  necessary  to  tunnel  these  hills  in  order  to  connect  the 
city  with  the  valley  of  Mill  creek,  where  the  roads  from  the  west 
had  their  termini.  Gradually  the  Terminal  Railroad  Association 
of  St.  Louis  acquired  the  several  independent  terminal  com- 
panies which  ministered  to  the  needs  of  different  groups  of  rail- 
roads, until  finally  it  was  practically  impossible  for  any  railroad 
to  pass  through,  or  even  enter,  St.  Louis  without  using  the  facili- 
ties controlled  by  this  company. 

The  question  before  the  Court  was  whether  this  unification 
of  the  terminal  facilities  was  a  combination  in  restraint  of  trade 
within  the  meaning  of  the  Sherman  Act.  The  Court  held  that 
the  mere  combining  of  several  independent  terminal  systems 
into  one  was  not  necessarily  a  restraint  upon  interstate  com- 
merce; a  unified  terminal  system  open  to  all  on  equal  terms  might 
be  of  the  greatest  public  utility,  particularly  in  a  city  like  St. 
Louis.  The  question  was  whether  this  particular  terminal  as- 
sociation was  unreasonable.  The  Court  held  that  it  was.  In  the 
first  place,  the  association  was  controlled  by  fourteen  of  the 
twenty-four  railroads  which  converged  at  St.  Louis,  while  the 
other  ten  had  no  stock  interest  in  it.  And  no  railroad  might  be- 
come a  member  of  the  terminal  association  without  the  unani- 
mous consent  of  the  fourteen  proprietary  companies,  as  they  were 
called.  While  counsel  for  the  terminal  company  claimed  that 
no  company  which  applied  would  be  refused  joint  use  or  owner- 
ship of  the  terminal  company,  the  fact  was  that  the  requirement 
of  unanimous  consent  still  remained.  It  was  also  true  that  the 
terminal  company  paid  no  dividends,  and  disclaimed  any  inten- 
tion of  ever  paying  any;  and  that  the  non-proprietary  railroads 
were  permitted  to  use  the  facilities  of  the  terminal  company 
upon  paying  the  same  charges  as  were  paid  by  the  proprietary 
companies.  But,  said  the  Court,  there  is  no  provision  guaran- 
teeing them  this  privilege.  It  may  also  be  true,  said  the  Court, 
that  the  proprietary  companies  have  not  availed  themselves 
of  the  full  measure  of  their  power  to  impede  the  free  competition 


424       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

of  outside  companies,  yet  it  objected  to  the  fact  that  the  com- 
panies outside  the  terminal  association  were  under  compulsion 
to  use  the  terminal  system,  yet  had  no  voice  in  its  control.  The 
Court  therefore  found  the  terminal  company  to  be  an  unreason- 
able restraint  of  interstate  commerce. 

The  government  had  asked  for  the  dissolution  of  the  terminal 
company  and  the  apportionment  of  its  business  among  the  three 
leading  component  parts.  As  matters  had  stood  prior  to  the 
enunciation  of  the  rule  of  reason,  it  is  likely  that  the  petition 
of  the  government  would  have  been  granted.  But  the  Court 
now  held  that  if  the  terminal  association  were  to  become  the 
bona  fide  agent  of  every  railroad  that  used  its  facilities  it  would 
no  longer  be  an  illegal  restraint  of  trade,  and  that  by  this 
means  there  would  be  preserved  for  the  public  the  obvious  ad- 
vantages of  unification,  thus  vindicating  the  wise  purpose  of 
the  statute. 

STANDARD     SANITARY      MANUFACTURING     COMPANY      V.      UNITED 

STATES  ^ 

This  was  a  suit  brought  by  the  government  against  sixteen 
corporate  and  thirty-four  individual  defendants.  The  corporate 
defendants  were  manufacturers  of  sanitary  enameled  iron  ware, 
such  as  bath  tubs,  wash  bowls,  drinking  fountains,  sinks,  and 
closets.  Up  to  about  1910  they  were  in  competition  with  each 
other,  but  the  government  alleged  that  they  had  then  estab- 
lished a  combination  controlling  85  per  cent  of  the  country's 
output  of  enameled  iron  ware. 

The  process  of  enameling  consisted  in  sifting  enameling  powder 
upon  iron  ware  brought  to  a  red  heat.  The  high  temperature 
fused  the  powder,  and  there  was  thus  formed  on  the  utensil  a 
hard,  impenetrable,  insoluble,  and  smooth  surface.  There 
were  a  number  of  patents  covering  the  application  of  the  powder, 
but  the  best  one  was  owned  by  the  Standard  Sanitary  Manu- 
facturing Company,  which  manufactured  some  50  per  cent  of 
the  enameled  iron  ware.  For  some  time  this  company  refused 
to  license  any  other  manufacturer  to  use  its  invention,  but 
1  226  U.  S.  20-52  (November  18,  1912). 


JUDICIAL  INTERPRETATION  425 

finally  it  seems  to  have  become  convinced  that  the  market  for 
its  products  was  being  damaged  through  the  production  of 
inferior  ware  under  other  patents.  Accordingly  it  was  agreed 
that  this  company,  and  the  Mott  Iron  Works,  and  L.  Wolff 
Manufacturing  Company,  owners  of  the  other  leading  patents, 
would  for  a  nominal  consideration  assign  their  patents  to  one 
Mr.  Wayman,  secretary  of  an  association  of  enameled  ware 
manufacturers,  subject  to  re-assignment  after  two  years  upon 
demand  by  the  owner  of  the  patent.  Mr.  Wayman  was  then  to 
license  the  various  manufacturers  to  use  these  patents.  The 
form  of  the  license  agreements  was  determined  by  a  committee, 
and  in  the  summer  of  1910  sixteen  manufacturers  of  enameled 
iron  ware  signed  license  agreement  papers. 

The  license  agreements  entered  into  by  the  manufacturers 
provided  that  the  licensee  (the  manufacturer)  might  use  the 
patents  held  by  Mr.  Wayman  by  paying  a  royalty  of  $5.00  per 
day  for  each  furnace  operated.  The  agreements  established  a 
scale  of  prices  which  the  licensee  agreed  to  maintain;  and  con- 
tained provisions  whereunder  changes  in  prices  might  be  made 
from  time  to  time.  Manufacturers  complying  with  the  agree- 
ments were  to  receive  back  at  the  end  of  each  month  80  per  cent 
of  the  royalties  paid  by  them. 

In  addition,  the  jobbers  were  brought  into  the  combination. 
The  jobbers  agreed  to  maintain  the  resale  prices  as  fixed  from 
time  to  time,  and  not  to  handle  the  goods  of  non-licensed  manu- 
facturers, except  upon  the  written  permission  of  the  licensor. 
A  breach  of  any  of  the  conditions  of  the  agreement  subjected 
the  contract  and  all  unfilled  orders  to  cancellation,  involved  a 
forfeiture  of  the  rebates  that  the  jobbers  received  for  comply- 
ing with  the  agreement,  and  further  a  forfeiture  of  the  power  to 
obtain  from  licensed  manufacturers  any  ware  manufactured 
under  the  patents. 

The  government  claimed  that  this  scheme  was  an  attempt 
to  conceal  an  agreement  fixing  prices  under  the  guise  of  a  licens- 
ing arrangement  for  the  use  of  patents;  that  behind  the  "grinning 
mask"  of  the  license  agreement  was  the  common,  vulgar  type  of 
monopoly  which  had  many  times  been  condemned  by  the  Court 


426       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

as  dangerous  alike  to  individual  liberty  and  public  well-being.* 
The  defendants  denied  these  allegations,  and  relied  in  large 
measure  on  the  privileges  accorded  by  the  patent  laws. 

The  Court  in  an  unanimous  opinion  said:  "The  agreements 
clearly  .  .  .  transcended  what  was  necessary  to  protect  the  use 
of  the  patent  or  the  monopoly  which  the  law  conferred  upon  it. 
They  passed  to  the  purpose  and  accomplished  a  restraint  of 
trade  condemned  by  the  Sherman  law.  It  had,  therefore,  a  pur- 
pose and  accomplished  a  result  not  shown "  in  the  Bement 
Case.  .  .  .  Rights  conferred  by  patents  are  indeed  very  definite 
and  extensive,  but  they  do  not  give  any  more  than  other  rights 
an  universal  license  against  positive  prohibitions.  The  Sherman 
law  is  a  limitation  of  rights,  rights  which  may  be  pushed  to  evil 
consequences  and  therefore  restrained." 

UNITED    STATES   V.    READING   COMPANY;    TEMPLE    IRON   COMPANY 
V.  UNITED  states;  READING  COMPANY  V.  UNITED  STATES  ^ 

This  was  a  bill  in  equity  filed  by  the  government  to  dissolve  the 
anthracite  coal  combination.'^  The  original  defendants  in  the 
suit  may  be  divided  into  three  groups:  (i)  the  Reading  Company 
(a  holding  company);  (2)  the  Philadelphia  and  Reading  Rail- 
way and  five  other  anthracite  railroads;  and  (3)  the  respective 
coal  companies  of  the  railroads,  including  the  Temple  Iron 
Company,  jointly  owned  by  the  six  defendant  carriers.  The 
Government  claimed  that  there  existed  between  the  defendants 
a  general  combination  formed  to  restrain  competition  in  the  pro- 
duction, sale,  and  transportation  in  interstate  commerce  of  an- 
thracite coal.  It  contended  that  this  general  combination  was 
established:  first,  by  evidence  of  an  agreement  among  the  car- 
rier defendants  to  apportion  among  themselves  according  to  a 
scale  of  percentages  the  total  output  of  coal  transported  from 

1  226  U.  S.  29-30. 

2  Italics  supplied  by  the  author. 

^  226  U.  S.  324-373  (December  16,  1912).  Justices  Day,  Hughes,  and 
Pitney  took  no  part  in  this  decision. 

■*  For  a  detailed  account  of  this  combination  see  the  author's  "The  Anthra- 
cite Coal  Combination  in  the  United  States." 


JUDICIAL  INTERPRETATION  427 

the  mines  to  tidewater;  second,  by  a  combination,  through  the 
instrumentality  of  the  Temple  Iron  Company,  to  prevent  the 
construction  of  a  new  and  competing  line  to  tidewater;  third, 
by  a  combination  to  buy,  according  to  a  series  of  identical  con- 
tracts, the  coal  produced  by  the  independent  operators,  thus 
preventing  competition  between  the  coal  produced  by  the  de- 
fendants and  that  produced  by  the  independents;  and,  fourth, 
by  certain  contributory  combinations,  participated  in  by  cer- 
tain of  the  defendants,  including  the  purchase  by  the  Erie  of  the 
New  York,  Susquehanna  and  Western  and  of  the  Pennsylvania 
Coal  Company  (with  its  allied  railroads),  and  the  acquisition 
by  the  Reading  Company  of  a  majority  of  the  stock  of  the 
Central  Railroad  of  New  Jersey. 

"The  case,"  said  the  Court,  "is  barren  of  documentary  evi- 
dence of  solidarity,"  ^  and  therefore  the  fact  of  a  general  com- 
bination, if  it  exists,  must  be  deduced  from  specific  acts  or  trans- 
actions in  which  the  companies  have  united,  and  from  which  a 
general  combination  may  be  inferred.  The  first  charge  was 
that  the  general  combination  was  established  by  the  agreement 
entered  into  between  the  carriers  in  1896  to  distribute,  according 
to  a  definite  scale  of  percentages,  the  tonnage  of  anthracite 
shipped  from  the  coal  regions  to  New  York  Harbor.  The  Court 
pointed  out  that  the  limited  character  of  the  coal  field  invited 
such  agreements,  and  that  it  was  probable  that  there  was  a 
conference  in  1896  as  charged;  but  it  held  that  the  scheme,  if 
attempted  (which  was  not  proven),  had  been  abandoned  long 
before  the  bill  was  filed,  and  that  the  government  had  there- 
fore failed  to  show  any  contract  or  agreement  for  the  distribu- 
tion of  tonnage. 

The  second  step  in  the  carrying  out  of  the  illegal  combination 
was  alleged  to  be  the  combination  of  six  anthracite  carriers 
through  the  Temple  Iron  Company  to  prevent  the  construction 
of  the  New  York,  Wyoming  and  Western  Railroad, — a  proposed 
independent  line  to  tide-water.^     Through  the  Temple  Iron 

*  226  U.  S.  344.    Italics  supplied  by  the  author. 

"^  For  details  see  the  author's  The  Anthracite  Coal  Combination  in  the 
United  States,  pp.  74-82. 


428       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Company,  owned  by  the  six  defendant  carriers,  the  colHeries 
of  the  principal  supporters  of  the  new  road  were  purchased,  and 
the  New  York,  Wyoming  and  Western,  to  use  the  Court's 
language,  was  "successfully  strangled."  This  combination 
the  Court  held  to  be  illegal.  It  pointed  out  that  the  Temple 
Iron  Company  "has  been  and  still  is  an  efficient  agency  for  the 
collective  activities  of  the  defendant  carriers  for  the  purpose  of 
preventing  competition  in  the  transportation  and  sale  of  coal 
in  other  States.  .  .  .  Through  it,  the  defendants,  in  combina- 
tion, may  absorb  the  remaining  output  of  independent  pro- 
ducers." The  Court  held  that  the  board  of  directors  of  the 
Temple  Iron  Company,  "composed  as  it  is  of  men  representing 
the  defendants,  supplies  time,  place  and  occasion  for  the  expres- 
sion of  plans  or  combinations  requiring  or  inviting  concert  of 
action." 

The  third  charge  was  that  the  defendants  and  a  number  of 
the  independent  operators  had  entered  into  contracts,  containing 
substantially  uniform  provisions  agreed  upon  beforehand  by 
the  defendant  carriers  in  concert,  whereby  the  independents 
agreed  to  deliver  to  the  railroad  coal  company  with  which  the 
contract  was  negotiated  all  the  coal  thereafter  mined  by  them  in 
return  for  a  definite  percentage  of  the  average  selling  price  of 
coal  at  tidewater  points  at  or  near  New  York  City.^  It  was 
further  charged  that  the  price  paid  was  more  than  the  operator 
could  get  if  he  attempted  to  market  his  coal  independently, 
and  that  the  difference  was  the  sum  paid  for  the  privilege  of 
controlling  the  sale  of  the  independent  output. 

The  Supreme  Court  sustained  these  charges  of  the  govern- 
ment, and  declared  the  percentage  contracts  illegal.  It  recited 
the  persistent  attempts  of  the  coal  operators  not  connected 
with  the  railroads  to  gain  an  independent  outlet  to  tidewater, — 
attempts  which  offered  a  constant  menace  to  the  monopoly 
of  transportation  enjoyed  by  the  defendants.  The  obvious 
solution  from  the  standpoint  of  the  defendants  was  to  tie  up 
the  independent  operators  by  means  of  perpetual  contracts  for 

'  For  the  details  as  to  these  "percentage"  contracts  see  the  author's  "The 
Anthracite  Coal  Combination  in  the  United  States,"  pp.  87-97. 


JUDICIAL  INTERPRETATION  429 

the  sale  of  their  coal.  The  Court  said  that  it  was  not  surprised 
that  the  railroads  were  willing  to  offer  unusually  favorable 
terms,  as  the  perpetual  contracts  would  remove  forever  the 
inducement  to  the  entry  of  competing  lines  of  anthracite  car- 
riers, and  would  remove,  also,  the  coal  of  the  independents  from 
competition  with  the  coal  of  the  defendants.  To  suppress  com- 
petition through  the  percentage  contracts  would  require,  how- 
ever, concerted  action,  as  the  attempt  of  a  few  to  secure  the 
independent  coal  would  have  been  resisted  by  the  others.  The 
Court  held  that  the  defendants  had  thus  acted  in  concert, 
and  that  the  contracts  were  therefore  unlawful,  even  though 
singly  they  might  not  have  been  in  restraint  of  trade. 

The  final  charge  was  that  the  purchase  of  the  New  York, 
Susquehanna  and  Western  and  the  Pennsylvania  Coal  Company 
by  the  Erie,  and  of  the  Central  of  New  Jersey  by  the  Reading 
Company,  were  illegal.  This  charge  was  dismissed  by  the  Court. 
It  held  that  it  did  not  appear  from  the  record  that  any  one  of 
these  three  transactions  was  the  result  of  any  general  combina- 
tion between  all  of  the  defendants,  and  if  they  did  not  constitute 
any  part  of  a  general  plan  or  combination  entered  into  by  all 
the  carrier  companies,  their  separate  consideration  as  inde- 
pendent violations  of  the  law  was  not  admissible  under  the 
general  frame  of  the  bill.  As  to  the  legality  of  these  three  minor 
combinations  the  Court  expressed  no  opinion,  but  directed 
that  the  bill,  in  so  far  as  it  sought  relief  against  them,  be  dis- 
missed, without  prejudice  to  the  bringing  of  a  new  action. 

UNITED  STATES  V.   PATTEN  ^ 

This  was  a  criminal  prosecution  brought  against  Mr.  James  A. 
Patten,  charging  violation  of  the  Sherman  Act  through  the  es- 
tablishment of  a  corner  in  cotton.  It  presented  the  question,  to 
use  the  Court's  language,  whether  a  conspiracy  to  run  a  comer 
in  the  available  supply  of  a  staple  commodity,  such  as  cotton, 
normally  a  subject  of  trade  and  commerce  among  the  states, 
and  thereby  to  enhance  artificially  its  price  throughout  the 
country,  was  within  the  terms  of  section  one  of  the  Anti-trust 
^  226  U.  S.  525-544  (January  6, 1913). 


430  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Act.  The  Circuit  Court  had  held  that  it  was  not,  and  for  three 
reasons:  first,  that  the  conspiracy  did  not  belong  to  the  class  in 
which  the  members,  engaged  in  interstate  trade,  agreed  to  sup- 
press competition  among  themselves.^  But  the  Supreme  Court 
held  that  section  one,  on  which  the  counts  were  founded,  related 
not  solely  to  voluntary  restraints,  such  as  resulted  when  persons 
engaged  in  interstate  trade  agreed  to  suppress  competition  among 
themselves,  but  related  as  well  to  involuntary  restraints,  such  as 
resulted  when  persons  not  so  engaged  conspired  to  compel  action 
by  others,  or  to  create  artificial  conditions,  which  necessarily 
impeded  or  burdened  the  due  course  of  such  trade  or  restricted 
the  common  liberty  to  engage  therein. 

The  Circuit  Court  had  held,  second,  that  running  a  corner, 
instead  of  restraining  competition,  tended,  temporarily  at  least, 
to  stimulate  it.  With  respect  to  this  point  the  Supreme  Court 
said,  "It  may  well  be  that  running  a  corner  tends  for  a  time  to 
stimulate  competition;  but  this  does  not  prevent  it  from  being 
a  forbidden  restraint,  for  it  also  operates  to  thwart  the  usual 
operation  of  the  laws  of  supply  and  demand,  to  withdraw  the 
commodity  from  the  normal  current  of  trade,  to  enhance  the 
price  artificially,  to  hamper  users  and  consumers  in  satisfying 
their  needs,  and  to  produce  practically  the  same  evils  as  does 
the  suppression  of  competition." 

Third,  the  Circuit  Court  had  held  that  the  obstruction  of  inter- 
state trade  resulting  from  the  operation  of  the  conspiracy,  even 
although  a  necessary  result,  would  be  so  indirect  as  not  to  be  a 
restraint  in  the  sense  of  the  statute.  The  Supreme  Court  in 
analyzing  this  claim  outlined  the  salient  features  of  the  con- 
spiracy. It  was,  it  said,  a  conspiracy  to  run  a  corner  in  the 
market.  The  commodity  to  be  cornered  was  cotton,  a  product 
of  the  southern  states,  mainly  used  in  the  northern  states,  and 
therefore  necessarily  the  subject  of  interstate  commerce.  The 
corner  was  to  be  conducted  on  the  Cotton  Exchange  in  New  York 
City,  but  by  means  that  would  enable  the  conspirators  to  ob- 
tain control  of  the  available  supply,  and  to  enhance  the  price  to 
all  buyers  in  every  market  of  the  country.  Upon  the  corner 
» i88  Fed.  Rep.  664-673. 


JUDICIAL  INTERPRETATION  43 1 

becoming  effective,  there  could  be  no  trading  in  the  commodity 
save  at  the  will  of  the  conspirators,  and  at  such  price  as  their 
interests  might  prompt  them  to  exact.  The  conspiracy  was  thus 
to  bring  within  its  dominating  influence  the  entire  cotton  trade 
of  the  country.  Such  being  the  nature,  object,  and  scope  of  the 
conspiracy  it  was  plain  that  by  its  necessary  operation  it  would 
directly  and  materially  impede  the  due  course  of  commerce 
among  the  states,  and  therefore  inflict  upon  the  public  the  in- 
juries which  the  Anti- trust  Act  was  designed  to  prevent.^ 

UNITED  STATES  V.  WINSLOW  ^ 

This  was  a  criminal  proceeding  brought  against  the  president 
of  the  United  Shoe  Machinery  Company  and  others,  charging 
them  with  forming  a  combination  in  restraint  of  trade  and  with 
forming  a  conspiracy.  The  alleged  facts  were  substantially 
as  follows:  Practically  all  the  shoes  worn  in  the  United  States 
are  made  with  the  aid  of  lasting  machines,  welt-sewing  machines, 
outsole-stitching  machines,  heeling  machines,  and  metallic- 
fastening  machines.  Up  to  February  7,  1899,  the  ConsoHdated 
and  McKay  Lasting  Machine  Company  made  60  per  cent  of  the 
lasting  machines;  the  Goodyear  Shoe  Machinery  Company 
made  80  per  cent  of  the  welt-sewing  and  outsole-stitching  ma- 
chines, and  10  per  cent  of  the  lasting  machines;  and  the  McKay 
Shoe  Machinery  Company  made  70  per  cent  of  the  heeling  ma- 
chines, and  So  per  cent  of  the  metallic-fastening  machines. 
On  February  7,  1899,  these  three  companies  organized  the 
United  Shoe  Machinery  Company  to  unite  the  businesses 
formerly  separately  controlled.  The  organization  of  the  United 
Shoe  Machinery  Company  and  its  acquisition  of  the  stocks  and 
business  of  these  companies  was  alleged  to  constitute  a  breach 
of  the  Sherman  Act. 

The  opinion  of  the  Court  was  unanimous  and  brief,  being 
embraced  in  less  than  four  pages.  It  is  to  be  observed,  said  the 
Court,  that  the  conditions  now  inserted  in  the  leases  of  shoe 

'  From  this  opinion  Chief  Justice  White  and  Justices  Lurton  and  Holmes 
dissented. 

2  227  U.  S.  202-218  (February  3,  1913). 


43^  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

machinery  to  shoe  manufacturers  are  not  alleged  to  have  been 
contemporaneous  with  the  combination,  or  to  have  been  contem- 
plated when  it  was  made.  The  District  Court  construed  the 
indictment  as  confined  to  the  combination  of  February  7  without 
regard  to  the  leases  subsequently  made,  and  we  have  no  jurisdic- 
tion to  review  this  interpretation  of  the  indictment.  The  vahd- 
ity  of  the  leases  or  of  a  combination  contemplating  them  is  there- 
fore not  before  us. 

The  question  to  be  decided,  said  the  Court,  is  whether  the 
combination  taken  by  itself  was  within  the  penalties  of  the 
Sherman  Act.    Thus  limited  the  question  did  not  require  much 
discussion.     On  the  face  of  it  the  combination  was  merely  an 
attempt  to  secure  greater  efficiency.    The  business  of  the  several 
companies  that  combined,  as  it  existed  prior  to  the  combination, 
is  assumed  to  have  been  legal.     The  machines  are  patented, 
making  them  a  monopoly  in  any  event;  and  it  may  be  assumed 
that  the  success  of  the  several  companies  was  due  to  their  patents 
having  been  the  best.    As,  by  the  interpretation  of  the  lower 
court  and  by  the  admission  in  argument  before  us,  these  com- 
panies did  not  compete  with  one  another,  it  is  difficult  to  see 
why  the  collective  business  should  be  any  worse  than  its  com- 
ponent parts.    We  can  see  no  greater  objection  to  one  corpora- 
tion manufacturing  seventy  per  cent  of  three  noncompeting 
groups  of  patented  machines  collectively  used  for  making  a 
single  product  than  to  three  corporations  making  the  same  pro- 
portion of  one  group  each.    The  disintegration  aimed  at  by  the 
statute  does  not  extend  to  reducing  all  manufacture  to  isolated 
units  of  the  lowest  degree.    The  case  was  therefore  dismissed. 

UNITED  STATES  V.  UNITED  SHOE  MACHINERY  COMPANY  ^ 

The  government  instituted  suit  against  the  United  Shoe 
Machinery  Company  on  December  12,  1911.  It  charged  a 
combination  of  manufacturers  of  shoe  machinery,  and  it  specif- 
ically attacked  certain  leases  of  the  company  which  were  as- 
serted to  be  the  means  whereby  competition  in  the  manufacture 

1  247  U.  S.  32-91  (May  20,  1918). 


JUDICIAL  INTERPRETATION  433 

of  shoe  machinery  was  restrained.^  The  defendant  claimed  that 
it  had  merely  combined  noncompeting  businesses;  and  that  the 
leases  were  but  the  exercise  of  undoubted  patent  rights.  The 
District  Court  dismissed  the  bill,  whereupon  the  goverrmient 
appealed  to  the  Supreme  Court. ^  This  body  in  an  opinion  ren- 
dered on  May  20,  1918,  upheld  the  decision  of  the  lower  court 
by  a  vote  of  four  to  three  (Justices  McReynolds  and  Brandeis, 
having  been  connected  with  suits  against  the  company,  being 
debarred  by  professional  ethics  from  participation  in  the  case). 

The  charge  of  the  government  was  two-fold:  first,  that  the 
United  Company  had  efifected  a  combination  of  competing  con- 
cerns engaged  in  the  manufacture  of  shoe  machinery  in  violation 
of  sections  one  and  two  of  the  Sherman  Act;  and,  second,  that  it 
had  entered  into  leases  ^\^th  shoe  manufacturers  which  extended 
the  control  achieved  by  the  act  of  combination.  With  respect  to 
the  first  contention  the  Supreme  Court  held  that  the  companies 
that  united  to  form  the  United  Shoe  Machinery  Company  were 
complementary,  not  competitive.  It  admitted  that  the  testi- 
mony was  conflicting,  and  might  lead  to  a  different  conclusion; 
but  it  accepted  the  verdict  of  the  lower  court  that  there  was  no 
practical  competition  among  these  companies.  It  decided 
likewise  as  to  the  companies  acquired  after  the  organization  of 
the  combination  in  1899.  These  acquisitions,  it  held,  did  not 
remove  competition  "in  any  practical  or  large  sense." 

Under  this  interpretation  there  was  obviously  no  occasion  to 
dissolve  the  United  Shoe  Machinery  Company.  It  was  undoubt- 
edly a  trust,  since  it  represented  the  union  of  a  group  of  concerns 
monopolizing  various  branches  of  the  shoe  machinery  business. 
But  it  was  not  an  illegal  trust,  since  the  constituent  companies 
were  patent  monopolies,  protected  by  law;  and  since,  not  being 
competitive  with  each  other,  there  was  no  bar  to  their  combina- 
tion. 

With  respect  to  the  leases  and  their  tying  clauses  the  Court 
held  that  they  were  simply  the  exercise  of  the  company's  right 
as  a  patentee.    The  leases  perhaps  restrained  the  trade  of  com- 

1  For  an  account  of  the  United  Shoe  Machinery  Company,  see  ch.  8. 

2  222  Fed.  Rep.  349-415. 


434        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

peting  manufacturers  of  shoe  machinery,  but  this  was  of  the 
nature  of  a  patent.  The  very  strength  of  a  patent  consists  in  the 
right  it  gives  to  exclude  others  from  the  use  of  the  invention  or  to 
permit  them  to  use  it  on  terms  imposed  by  the  patentee;  and  its 
employment  in  this  manner  was  not  necessarily  an  offense 
against  the  Anti-trust  Act.  The  Court  pointed  out  that  the 
patents  did  not  permit  unlawful  restraints,  such  as  were  em- 
ployed by  the  Standard  Sanitary  Manufacturing  Company; 
but  the  leases  of  the  United  Shoe  Machinery  Company  were  not 
of  that  nature.  They  were  bargains  based  on  patent  rights, 
agreed  to  by  the  lessees,  and  entitled  to  the  sanction  of  the  law. 

In  a  dissenting  opinion  (concurred  in  by  Justices  Day  and 
Pitney)  Justice  Clarke  declared  that  some  of  the  companies 
originally  combined  in  the  United  Company  were  competitive; 
that  this  was  established  by  the  testimony  of  the  organizers. 
These  individuals,  knowing  precisely  what  they  hoped  to  accom- 
pHsh,  had  rejected  a  '' harmonious  arrangement"  or  a  "working 
agreement"  from  an  idea  that  "it  might  be  deemed  to  be  a 
combination  in  restraint  of  trade,"  but  to  accomplish  the  same 
end  had  adopted  the  scheme  of  merger,  later  condemned  by  the 
Supreme  Court  in  the  Tobacco  case  as  a  mere  subterfuge  of  form. 
Justice  Clarke  vigorously  protested  against  deciding  the  case 
upon  refined  distinctions  as  to  the  application  of  the  patent 
law. 

In  a  separate  dissenting  opinion  (concurred  in  by  Justices 
Clarke  and  Pitney)  Justice  Day  attacked  particularly  the 
majority  opinion  sustaining  the  tying  clauses  in  the  leases. 
Referring  to  Straus  v.  American  Publishers'  Association,  in  which 
the  Court  had  held  that  the  patent  statute  was  not  intended  to 
authorize  agreements  in  unlawful  restraint  of  trade  and  tending 
to  monopoly,  in  violation  of  the  specific  terms  of  the  Sherman 
law,^  he  declared  that  it  was  apparent  from  a  mere  statement  of 
the  terms  of  the  lease  restrictions  that  they  tended  to  monopolize 
an  important  trade  in  interstate  commerce.  To  sustain  the 
provisions  of  the  leases  he  regarded  as  a  grant  of  authority  to 
holders  of  patented  inventions  to  build  up  monopolies  in  direct 
1  231  U.  S.  234. 


JUDICIAL  INTERPRETATION  '        435 

violation  of  the  Sherman  Act,  under  the  guise  of  leasing  the  use  of 
patented  machinery. 

UNITED  STATES  V.  INTERNATIONAL  HARVESTER  COMPANY  ^ 

The  organization  of  the  harvester  trust  has  been  described  in 
chapter  X.  In  1912  the  government  instituted  suit  under  the 
Sherman  Act,  asking  for  the  dissolution  of  the  company.  The 
Circuit  Court  decided  in  favor  of  the  government  on  August  12, 
1914.  The  company  appealed  to  the  Supreme  Court,  but  be- 
fore a  decision  was  rendered  it  withdrew  its  appeal,  and  accepted 
the  decree  of  the  lower  court.  The  nature  of  the  dissolution 
agreed  upon  will  be  described  in  chapter  XVIII;  at  this  point 
merely  the  decision  of  the  Circuit  Court  will  be  outlined. 
,  The  Circuit  Court,  Judge  Sanborn  dissenting,  held  the  Inter- 
national Harvester  Company  to  be  a  combination  in  unreason- 
able restraint  of  trade.  Three  separate  opinions  were  rendered. 
Judge  Smith,  after  reviewing  the  facts  and  pertinent  decisions, 
said  that  while  there  was  no  limit  under  the  American  law  to 
which  a  business  might  not  independently  grow,  and  while  even 
a  combination  of  two  or  more  companies  was  not  illegal  if  it  did 
not  unreasonably  restrain  trade,  yet  when  80  to  85  per  cent  of  the 
business  was  combined,  and  by  the  combination  all  competition 
was  eliminated  between  the  members  thereof,  the  resulting 
restraint  of  trade  was  unreasonable.  He  therefore  ordered  the 
harvester  trust  dissolved. 

Judge  Hook  concurred  in  the  foregoing  opinion.  He  said  in 
part:  "The  International  Harvester  Company  is  not  the  result 
of  the  normal  growth  of  the  fair  enterprise  of  an  individual,  a 
partnership  or  a  corporation.  On  the  contrary,  it  was  created  by 
combining  five  great  competing  companies  which  controlled  more 
than  80  per  cent,  of  the  trade  in  necessary  farm  implements,  and 
it  still  maintains  a  substantial  dominance.  That  is  the  con- 
trolling fact;  all  else  is  detail." 

Judge  Sanborn  dissented  at  considerable  length.    He  dissented 
because  in  his  opinion  the  crucial  issue  was  not  whether  in  1902 
the  International  Harvester  Company  had  established  a  combi- 
1  214  Fed.  Rep.  987-1012. 


436  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

nation  in  restraint  of  trade,  but  whether  in  191 2,  when  the  suit 
was  brought,  it  was  then  unreasonably  restraining  or  monopoKz- 
ing  trade,  or  threatening  to  do  so;  and  because  the  evidence  in 
the  case  had  convinced  him  that  the  company  was  not  then  and 
had  not  for  at  least  seven  years  previous  to  the  commencement  of 
the  suit  been  restraining  or  threatening  to  restrain  trade  unduly. 
The  criterion  of  "  unreasonable"  restraint  he  held  to  be  a  restric- 
tion of  competition  that  unduly  injured  the  public  by  (i)  raising 
the  prices  of  the  articles,  or  (2)  limiting  their  production,  or 
(3)  deteriorating  their  quality,  or  (4)  decreasing  the  prices  paid 
for  the  labor  or  materials  required  to  produce  them,  or  (5) 
oppressing  competitors;  and  the  evidence  established,  he  main- 
tained, that  the  company  had  not  been  guilty  of  any  of  these 
practices.  He  therefore  favored  the  dismissal  of  the  suit  with- 
out prejudicing  the  right  of  the  government  to  institute  similar 
proceedings  whenever  the  company  committed  any  acts  in 
violation  of  the  Sherman  law. 

The  Harvester  case  was  thus  a  highly  significant  one,  since 
it  clearly  presented  to  the  courts  the  question  whether  the  Sher- 
man Act  forbids  combinations  that  hold  a  dominant  or  prepon- 
derant position  in  the  industry,  entirely  apart  from  the  manner 
in  which  they  exercise  their  vast  power;  or  whether  it  merely 
forbids  such  combinations  when  they  abuse  their  power,  as,  for 
example,  by  advancing  prices,  limiting  the  supply,  lowering  the 
quality,  reducing  wages,  or  oppressing  competitors.  To  state  it 
somewhat  differently,  the  Harvester  case  involved  a  determina- 
tion of  the  question  whether  the  Sherman  Act  forbids  all  trusts, 
or  merely  the  "  bad  "  trusts;  for  the  International  Harvester  Com- 
pany was  a  "good  "  trust,  if  there  were  any  such.  It  is  therefore 
much  to  be  regretted  that  through  the  force  of  circumstances  a  de- 
cision of  the  Supreme  Court  on  this  vital  matter  was  not  obtained. 

UNITED  STATES  V.  CORN  PRODUCTS  REFINING  COMPANY  ^ 

On  March  i,  1913,  the  government  filed  a  petition  against  the 
Corn  Products  Refining  Company,  asking  that  it  be  adjudged 

^  234  Fed.  Rep.  964-1018.  A  study  of  the  glucose  trust  is  in  Dewing, 
Corporate  Pronaotions  and  Reorganizations,  ch.  4. 


JUDICIAL  INTERPRETATION  437 

to  be  a  combination  in  restraint  of  trade  and  an  illegal  mo- 
nopoly. The  decision  of  the  District  Court  sustaining  the 
government,  and  granting  the  relief  prayed  for,  was  rendered  on 
June  24,  1916.  The  company  appealed,  but  subsequently  with- 
drew its  appeal.  The  decision  of  the  lower  court  was  thus 
controlling. 

With  regard  to  the  law  the  Court,  referring  to  the  Harvester 
case,  agreed  that  it  was  an  open  question  whether  the  test  of 
illegality  under  the  Sherman  Act  was  to  be  found  only  in  the 
combination  of  enough  producing  capacity  to  control  supply  and 
fix  prices,  or  whether  it  must  also  be  proven  that  the  combination 
had  used  its  power  to  the  injury  of  the  public;  but  it  expressed 
the  opinion  that  the  test  was  the  power,  and  not  its  exercise.  In 
the  case  of  the  Corn  Products  Refining  Company,  however,  this 
question  was  held  to  be  academic,  since  the  company  was  illegal 
under  either  test.  The  company  by  the  combination  in  1906  had 
acquired  control  of  all  the  glucose  plants  in  the  country,  and  of 
plants  making  about  64  per  cent  of  the  output  of  starch;  and  had 
manifested  a  "continuous  and  deliberate  purpose  ...  by  every 
device  which  their  ingenuity  could  discover,  to  maintain  as 
completely  as  possible  their  original  domination  of  the  industry." 
It  thus  had  the  power — diminished,  to  be  sure,  since  1906,  yet 
still  the  power — to  restrain  trade;  and  it  had  steadfastly  used  it 
in  an  illegal  manner. 

The  issue  was  therefore  as  to  the  remedy.  The  necessity  of 
an  injunction  to  restrain  the  company  from  employing  in  the 
future  those  unfair  practices  that  had  hampered  independent 
enterprise  in  the  past  was  held  to  be  clear;  and  the  court  there- 
fore specifically  forbade  the  resort  to  low-price  campaigns,  bogus 
independents,  price  agreements,  and  the  like.  As  to  the  advisa- 
bility of  a  dissolution  the  Court  was  not  so  certain,  but  it  decided, 
in  view  of  the  "inveterate  and  incorrigible"  insistence  of  the 
company  upon  interfering  with  freedom  of  commerce,  to  pre- 
scribe also  the  more  drastic  remedy.  The  Court  did  not  indicate 
what  the  form  of  the  decree  would  be — the  plan  was  to  be  filed 
with  the  Federal  Trade  Commission,  as  permitted  by  the  Trade 
Commission  Act — but  it  stated  that  it  would  be  similar  to  the 


438  THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Harvester  decree,  and  it  implied  that  no  dissolution  would  be 
satisfactory  that  left  as  much  as  60  per  cent  of  the  trade  in  the 
hands  of  one  company.^ 

UNITED  STATES  V.  UNITED  STATES  STEEL  CORPORATION  ^ 

The  organization  of  the  United  States  Steel  Corporation  has 
been  discussed  in  chapter  IX.  In  October,  19 11,  the  govern- 
ment brought  suit  against  the  company,  asking  that  it  be  dis- 
solved on  the  ground  that  it  was  engaged  in  an  illegal  restraint  of 
trade,  and  was  a  monopoly.  In  a  decision  rendered  on  June  3, 
1915,  the  District  Court  judges  unanimously  dismissed  the  bill, 
though  they  disagreed  as  to  the  grounds  for  the  dismissal.^  The 
decision  of  the  Supreme  Court  came  on  March  i,  1920.  Four 
judges  found  for  the  Steel  Corporation,  three  against,  and  two 
did  not  participate,  one  having  as  Attorney  General  been  as- 
sociated with  the  proceeding  against  the  Corporation,  and  the 
other  as  a  private  citizen  having  expressed  the  opinion  that  the 
Corporation  was  illegal  and  uneconomic.  It  is  probable,  there- 
fore, as  in  the  Shoe  Machinery  case,  that  the  decision  of  the 
Court  did  not  represent  the  opinion  of  the  majority. 

The  Supreme  Court  after  reviewing  the  decisions  of  the 
judges  of  the  lower  court  held  that  it  was  clear  that  while  there 
might  be  two  opinions  as  to  the  purpose  of  the  organizers  of  the 
Steel  Corporation,  there  was  no  doubt  that  the  Corporation  had 
never  possessed,  and  did  not  then  possess,  a  monopoly.  And  it 
was  against  monopoly  that  the  Sherman  Act  was  directed;  not 
against  the  expectation  thereof,  but  against  its  realization.  The 
Corporation,  to  be  sure,  had  attained  much  greater  power  than 
any  other  competitor,  yet  not  greater  than  all  of  them  combined; 
and  monopoly  therefore  had  not  been  achieved."*  Because  of  its 
failure  to  achieve  monopoly  the  Corporation  had  found  it  advis- 
able to  cooperate  with  its  competitors  through  pools,  associa- 
tions, trade  meetings,  and  social  dinners.    The  Court  held  these 

1  The  substance  of  the  decree  is  given  on  p.  484. 

2  251  U.  S.  417-466  (March  i,  1920). 
'  223  Fed.  Rep.  55-179. 

*  251  U.  S.  444. 


JUDICIAL  INTERPRETATION  439 

arrangements  to  be  violations  of  the  law,  yet  transient  in  their 
purpose  and  effect.  From  a  conviction  of  their  futihty  they  had 
been  abandoned  nine  months  before  the  suit  was  brought;  and 
they  liad  not  been  resumed,  nor  was  there  any  evidence  of  an 
intention  to  resume  them.  Even  the  government  did  not  antic- 
ipate their  resumption,  said  the  Court,  for  it  failed  to  avail 
itself  of  the  offer  of  the  lower  court  to  retain  jurisdiction  of  the 
case  for  the  purpose  of  enjoining  such  acts,  if  they  were  ever 
attempted. 

The  Corporation  not  having  a  monopoly,  what  could  be 
charged  against  it?  It  had  not  the  power  unaided  to  fix  prices; 
and  it  had  not  committed  any  acts  of  aggression  upon  its  com- 
petitors. It  was  of  impressive  size,  to  be  sure,  yet  the  law,  the 
Court  held,  does  not  make  mere  size  nor  the  existence  of  un- 
exerted  power  an  offense;  rather  it  requires  the  performance  of 
overt  acts.  When  there  were  no  restraints  of  competitors  in  the 
trade  nor  any  complaints  by  customers,  it  was  difficult  to  see, 
said  the  Court,  how  there  could  be  any  restraint  of  trade. 

In  conclusion  the  Court  found  itself  unable  to  discover  how  the 
public  interest  would  be  subserved  by  the  dissolution  of  the 
Corporation;  on  the  contrary,  its  dissolution  might  do  injury 
to  the  public  interest,  including  a  material  disturbance  to  the 
foreign  trade.  The  bill  of  the  government  was  accordingly 
dismissed. 

The  dissenting  opinion  held  that  the  record  left  no  fair  room 
for  doubt  that  the  Steel  Corporation  and  its  several  subsidiary 
corporations  were  formed  in  violation  of  the  Sherman  Act. 
It  quoted  with  approval  from  the  opinion  of  Judge  WooUey  of 
the  lower  court,  who  found  that  the  control  of  the  various  steel 
companies  later  combined  in  the  Corporation  had  embraced  in 
'^ome  instances  from  80  to  95  per  cent  of  the  total  output  of  the 
country,  and  had  resulted  in  an  immediate  increase  in  prices,  in 
some  cases  double  and  in  other  cases  treble  what  they  had  been 
before,  yielding  in  consequence  large  dividends  upon  greatly 
inflated  capital.  It  was  held  that  the  record  disclosed  that  the 
Corporation  for  many  years  after  its  formation  had  exerted  its 
power  to  control  and  maintain  prices  by  pools,  associations, 


440     THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

trade  meetings,  and  dinners;  and  that  in  combination  with  its 
competitors  it  had  an  abiHty  "to  fix  prices  and  restrain  the  free 
flow  of  commerce  upon  a  scale  heretofore  unapproached  in  the 
history  of  corporate  organization  in  this  country." 

The  dissenting  opinion  agreed  that  the  Sherman  Act  offers 
no  objection  to  the  size  that  a  corporation  may  reach,  nor  to  the 
continued  exertion  of  lawful  power,  when  that  size  and  power 
were  obtained  by  lawful  means  and  developed  by  natural  growth. 
But  it  declared  that  the  reiterated  decisions  of  the  Supreme 
Court  had  held  that  this  power  might  not  legally  be  derived  from 
conspiracies,  combinations,  or  contracts  in  restraint  of  trade;  and 
that  to  hold  otherwise  was  practically  to  annul  the  Sherman  Act 
by  judicial  decree. 

Concluding  the  dissenting  opinion  Justice  Day  held  that  the 
decision  of  the  majority  amounted  to  an  assertion  that  the  Steel 
Corporation  and  its  subsidiaries,  although  organized  in  plain 
violation  and  bold  defiance  of  the  Sherman  Act,  nevertheless 
were  immune  from  a  decree  effectually  ending  the  combinations, 
because  of  some  reasons  of  public  policy  requiring  such  conclu- 
sion. But,  he  said,  "I  know  of  no  public  policy  which  sanctions 
a  violation  of  the  law,  nor  of  any  inconvenience  to  trade,  do- 
mestic or  foreign,  which  should  have  the  effect  of  placing  combi- 
nations, which  have  been  able  to  thus  organize  one  of  the  great- 
est industries  of  the  country  in  defiance  of  law,  in  an  impregnable 
position  above  the  control  of  the  law  forbidding  such  combina- 
tions. Such  a  conclusion  does  violence  to  the  policy  which  the 
law  was  intended  to  enforce,  runs  counter  to  the  decisions  of 
the  court,  and  necessarily  results  in  a  practical  nullification  of  the 
Act  itself." 


CHAPTER  XVIII 
TRUST  DISSOLUTION    PROCEEDINGS 

In  this  chapter  the  record  of  the  several  administrations 
in  the  enforcement  of  the  anti-trust  laws  will  be  summarized,  the 
trust  dissolution  proceedings  will  be  described  at  some  length, 
and  the  results  will  be  briefly  appraised. 

During  the  administration  of  Benjamin  Harrison,  who  was 
President  at  the  time  of  the  passage  of  the  Sherman  Act  (1890), 
four  bills  in  equity  and  three  indictments  were  brought  under 
the  anti- trust  act.^  The  first  important  case  was  U.  S.  v. 
Greenhut,^  a  criminal  indictment  of  the  officers  of  the  Distilling 
and  Cattle  Feeding  Company  (the  whisky  trust)  for  an  alleged 
monopolization  of  the  manufacture  and  sale  of  distilled  spirits. 
The  district  judge  in  quashing  the  indictment  said  that  the 
indictment  averred  merely  that  the  defendants  had  monopolized 
the  manufacture  and  sale  of  distilled  spirits,  and  did  not  aver 
that  they  had  monopolized,  or  combined  to  monopolize,  inter- 
state or  foreign  commerce  in  distilled  spirits.  The  indictment 
therefore  charged  no  offense  within  the  letter  or  spirit  of  section 
two  of  the  Sherman  Act. 

The  outcome  of  this  suit  may  be  interpreted  as  a  severe  coun- 
ter indictment  of  the  Department  of  Justice;  and  it  is  perhaps 
indicative  of  the  attitude  of  this  department  that  it  allowed  itself 
to  be  discouraged  by  this  rebuff,  and  decided  to  abandon  alto- 
gether the  prosecution  of  the  whisky  trust. 

Another  case  was  U.  S.  v.  Patterson,^  a  criminal  proceeding 

iThe  Federal  Antitrust  Laws,  July  i,  1916,  pp.  44-46.  This  pamphlet 
contains  a  list  of  the  cases  instituted  by  the  United  States  under  the  anti- 
trust acts. 

2  50  Fed.  Rep.  469  (May  16,  1892). 

=•  55  Fed.  Rep.  605  (February  28,  1893);  ^^^  SQ  Fed.  Rep.  280  (June  i, 
1893)- 

441 


442       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

against  the  members  of  a  combination  to  control  the  price  of  cash 
registers.  The  indictment  was  sustained  in  part  by  a  lower  court, 
but  the  Attorney  General  allowed  the  case  to  lapse  because  the 
complaining  witness  had  joined  the  combination.^  This  was 
indeed  a  strange  outcome  of  a  case  brought  under  a  law  designed 
to  prevent  combinations  in  restraint  of  trade. 

A  more  important  case  was  U.  S.  v.  E.  C.  Knight  Company, 
a  bill  in  equity  to  prevent  the  American  Sugar  Refining  Com- 
pany (the  sugar  trust)  from  retaining  control  of  the  four  Phila- 
delphia refineries,  the  acquisition  of  which,  it  was  alleged,  consti- 
tuted a  violation  of  the  Sherman  Act.  The  government  lost  this 
suit,  as  already  pointed  out,-  because  of  defects  in  procedure.  It 
attacked  the  defendants  for  acts  relating  to  the  business  of  sugar 
refining  within  a  state,  and  failed  to  produce  any  proofs  of  a 
restraint  upon  interstate  commerce.  Had  the  government 
under  the  direction  of  the  Attorney  General  presented  its  cause 
properly  the  decision  of  the  Supreme  Court  in  this  case — the 
first  one  involving  the  Sherman  Act  to  come  before  it — would 
probably  have  been  dift"erent,  and  the  trust  movement  of  the  late 
nineties  might  never  have  taken  place. 

None  of  the  other  four  cases  instituted  during  President 
Harrison's  administration  were  trust  cases.  One  was  a  freight 
association  case  (the  Trans-Missouri  Freight  Association); 
another  was  a  trade  union  case;  and  the  other  two  dealt  with 
combinations  more  or  less  local  in  character.^  It  is  clear,  there- 
fore, that  the  trust  cases  initiated  during  President  Harrison's 
administration  came  to  naught,  and  that  this  was  largely  owing 
to  the  attitude  of  the  first  two  Attorney  Generals,  whose  official 
duty  it  was  to  enforce  the  statute. 

During  the  second  term  of  President  Cleveland  (1893-1897) 
there  were  brought  four  bills  in  equity,  two  indictments,  and 
two  contempt  proceedings.^  The  most  important  of  these  cases 
was  U.  S.  V.  Addyston  Pipe  and  Steel  Company,  a  bill  m  equity 

'  The  Federal  Antitrust  Laws,  July  i,  1916,  p.  46. 
2  See  p.  388. 

^  The  Federal  Antitrust  Laws,  July  i,  1916,  pp.  44-46. 
*  Ibid.,  pp.  46-49. 


TRUST  DISSOLUTION  PROCEEDINGS  443 

to  dissolve  the  cast  iron  pipe  combination.^  The  government 
obtained  a  victory  in  this  instance, — a  victory  which  doubtless 
restrained  somewhat  the  subsequent  activities  of  trust  pro- 
moters, since  it  demonstrated  that  the  Sherman  Act  was  really 
possessed  of  "  teeth."  Yet  this  case  was  the  only  one  of  the  eight 
that  dealt  with  an  industrial  combination  of  national  impor- 
tance. Four  of  them  dealt  with  trade  unions,  one  with  a  traffic 
association  (the  Joint  Traffic  Association),  and  the  other  two 
with  organizations  of  rather  limited  scope.  It  may  be  asked 
why  no  proceedings  were  instituted  against  the  cigarette,  oil, 
powder,  cordage,  and  other  trusts,  all  of  which  were  more  im- 
portant than  the  cast  iron  pipe  combination,  which,  after  all, 
was  essentially  a  pool,  and  therefore  in  some  ways  not  so  danger- 
ous as  the  more  binding  organizations  left  undisturbed  by  the 
Attorney  General.  No  doubt  the  Department  of  Justice  was  dis- 
couraged by  the  decision  in  the  Knight  case,  and  no  doubt  the 
funds  available  for  investigation  and  prosecution  were  limited;  ^ 
yet  this  hardly  explains  the  failure  to  prosecute  the  trusts, 
against  which  the  law  was  really  aimed,  rather  than  such  organ- 
izations as  the  Kansas  City  Live  Stock  Exchange. 

If  the  accomplishments  of  the  Harrison  and  Cleveland  admin- 
istrations were  meagre,  those  of  the  McKinley  administration 
were  even  more  so.  During  the  four  and  a  half  years  of  Mc- 
Kinley's  presidency  no  criminal  prosecutions  were  brought  and 
only  three  bills  in  equity.^  Of  these  three,  one  was  against  a 
local  live  stock  association,  another  against  a  combination  of 
coal  dealers  in  California,  and  the  third  against  a  combination' 
of  coal  producers  in  Ohio  and  West  Virginia.  It  was  during  this 
administration  that  the  modern  trust  movement  reached  its 
height,  and  yet  not  a  single  suit  against  a  trust  was  brought. 

Upon  the  death  of  President  McKinley  on  September  14, 
1901,  Theodore  Roosevelt  became  President.  In  marked  con- 
trast to  his  predecessor  in  office.  President  Roosevelt  enforced 

^  For  the  decision  of  the  Supreme  Court,  see  p.  395. 

2  See  Annual  Report  of  the  Attorney  General  (Harmon)  for  1896, 
p.  XXVII. 

3  The  Federal  Antitrust  Laws,  July  i,  1916,  pp.  49-50. 


444       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  Sherman  Anti-trust  Act  with  decided  vigor.  During  the 
seven  and  one- half  years  of  his  administration  there  were  brought 
eighteen  bills  in  equity,  twenty- five  indictments,  and  one  for- 
feiture proceeding.^  Among  the  trusts  attacked  were  the  oil 
trust  (the  Standard  Oil  Company),  the  tobacco  trust  (the  Amer- 
ican Tobacco  Company),  and  the  powder  trust  (the  du  Pont  de 
Nemours  and  Company).  Lesser  combinations  attacked 
included  those  in  the  meat-packing,  salt,  paper,  licorice,  ele- 
vator, naval  stores,  and  furniture  industries.  Moreover,  a  num- 
ber of  important  railroad  combinations  were  proceeded  against. 
These  included  the  Northern  Securities  Company,  the  St.  Louis 
Terminal  Railroad  Association,  the  Reading  Company,  the 
Union  Pacific  Railroad  Company,  and  the  New  Haven  Railroad 
Company.  Furthermore,  legislation  was  enacted  to  create  a 
Bureau  of  Corporations;  to  expedite  cases  arising  under  the 
anti- trust  act;  and  to  supply  the  Department  of  Justice  with 
ample  funds  to  prosecute  unlawful  combinations. 

The  record  of  the  Roosevelt  administration  in  turn  was  far 
eclipsed  by  that  of  the  Taft  administration.  During  the  seven 
and  one-half  years  of  Roosevelt's  presidency  forty-four  proceed- 
ings all  told  had  been  instituted,  while  during  the  four  years 
that  Taft  was  President  there  were  brought  forty- six  bills  in 
equity,  forty-three  indictments,  and  one  contempt  proceeding, — 
a  total  of  ninety,  or  more  than  twice  as  many  proceedings  in 
about  half  as  long  a  period.^  Moreover,  the  suits  filed  by  At- 
torney General  Wickersham  (President  Taf t's  Attorney  General) 
included  a  number  of  very  important  trusts  and  combinations 
not  disturbed  by  the  preceding  administration.  Among  them 
were  the  following:  the  United  States  Steel  Corporation,  the 
American  Sugar  Refining  Company,  the  United  Shoe  Machinery 
Company,  the  International  Harvester  Company,  the  National 
Cash  Register  Company,  the  Keystone  Watch  Case  Company,  the 
Corn  Products  Refining  Company,  the  Standard  Sanitary  Manu- 
facturing Company,  the  American  Thread  Company,  the  General 
Electric  Company,  and  the  American  Coal  Products  Company. 

1  The  Federal  Antitrust  Laws,  July  i,  1916,  pp.  50-61. 
2Ibid.,  pp.  61-81. 


TRUST  DISSOLUTION  PROCEEDINGS  44S 

During  President  Wilson's  first  term  thirteen  bills  in  equity 
and  twenty-one  indictments  were  filed,  a  total  of  thirty-four  as 
compared  with  ninety  during  the  four  years  of  his  predecessor.* 
Furthermore,  far-reaching  amendments  to  the  Sherman  Act 
were  enacted.  During  the  period  down  to  September  8,  1920, 
twenty-two  additional  bills  and  twenty-four  additional  indict- 
ments were  brought.  Among  the  combinations  proceeded 
against  were:  the  Eastman  Kodak  Company,  the  Quaker  Oats 
Company,  the  American  Can  Company,  the  Lehigh  Valley  Rail- 
road, and  (for  the  second  time)  the  Reading  Company  and  the 
New  Haven  Railroad.  The  list  is  not  imposing,  yet  by  the 
beginning  of  President  Wilson's  administration  the  principal 
trusts  and  combinations  had  already  been  proceeded  against. 

The  individual  dissolution  proceedings  may  next  be  described. 

THE  OIL  TRUST 

The  first  trust  to  be  formally  dissolved  under  the  Sherman 
Act  was  the  Standard  Oil  Company.-  The  history  of  the  suit 
against  this  company  and  the  decrees  of  the  Circuit  and  Su- 
preme Courts  have  already  been  outlined.  The  reader  uill  recall 
that  the  decree  of  the  Circuit  Court — which  was  approved  in 
the  main  by  the  Supreme  Court — forbade  the  Standard  Oil 
Company  of  New  Jersey,  and  its  officers  and  directors,  to  vote 
the  stock  of  its  subsidiary  companies;  to  exercise  any  control 
over  their  operations;  to  continue  the  unlawful  combination; 
or  to  enter  into  any  like  combination  to  restrain  commerce. 
But  the  Court  specifically  said  that  the  Standard  Oil  Company 
of  New  Jersey  was  not  prohibited  by  the  decree  from  distributing 
ratably  to  its  shareholders  the  shares  of  stock  in  the  subsidiary 
companies  parties  to  the  combination  to  which  they  (the  share- 

1  See  Annual  Reports  of  the  Attorney  General. 

2  A  paper  combination  was  dissolved  by  judicial  order  on  May  11,  1906, 
but  this  combination,  brought  about  by  making  the  General  Paper  Company 
the  sales  agent  for  some  twenty-three  paper  concerns,  was  essentially  a  pool. 
(See  Report  of  the  Senate  Committee  on  Control  of  Corporations,  1913, 
p.  945.)  A  combination  of  elevator  companies,  including  the  Otis  Elevator 
Company,  was  dissolved  by  a  decree  entered  June  i,  1906,  but  this  was  a 
consent  decree.    (See  ibid.,  p.  946.) 


446       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

holders)  were  equitably  entitled.  This  suggestion  was  seized 
upon  by  the  defendants,  and  made  the  basis  of  their  plan  of  dis- 
solution. In  a  circular  dated  July  28,  191 1,  the  Standard  Oil 
Company  of  New  Jersey  (the  parent  company)  announced  that 
it  would  distribute  to  its  stockholders  (as  of  September  i,  igri) 
the  stock  of  thirty-two  American  subsidiaries  and  of  one  for- 
eign subsidiary;  and  this  distribution  was  made  on  December  i.^ 
By  this  distribution  each  owner  of  one  share  of  stock  in  the 
Standard  Oil  Company  of  New  Jersey  received  securities  (gen- 
erally fractional  shares)  of  an  aggregate  face  value  of  approxi- 
imately  $178;  -  and  in  addition  retained,  of  course,  his  stock  in 
the  parent  company,  which  continued  as  a  producing  concern, 
operating  its  large  refineries  at  Bayonne,  New  Jersey;  Balti- 
more, Maryland;  and  Parkersburg,  West  Virginia. 

The  decree  contained  no  express  prohibition  of  common 
officers  or  directors  among  the  New  Jersey  corporation  and  its 
former  subsidiaries  (none  of  which  was  dissolved),  but  at  meet- 
ings of  the  Standard  Oil  Company  of  New  Jersey  and  the  Stand- 
ard Oil  Company  of  New  York  on  December  4  some  important 
changes  in  organization  were  made.  Mr.  John  D.  Rockfeller 
resigned  as  president  and  director  of  the  Standard  Oil  Com- 
pany of  New  Jersey.  Mr.  William  Rockefeller,  president  of  the 
Standard  Oil  Company  of  New  York,  vice  president  of  the 
Standard  Oil  Company  of  New  Jersey,  and  a  director  in  both 
companies,  resigned  from  all  these  positions.  Mr.  John  D. 
Archbold,  vice  president  of  the  Standard  Oil  Company  of  New 
Jersey,  was  elevated  to  the  presidency;  but  resigned  as  vice 
president  and  director  of  the  Standard  Oil  Company  of  New 
York.  Mr.  H.  C.  Folger,  Jr.,  vice  president  of  the  New  York 
concern,  was  made  president;  but  he  handed  in  his  resignatior 
as  secretary  and  director  of  the  New  Jersey  company.  Mr.  A.  C 
Bedford,  a  director  of  the  New  York  concern,  resigned  to  be- 
come vice  president  and  treasurer  of  the  New  Jersey  concern. 

'  The  stock  of  the  foreign  subsidiary  was  not  distributed  until  a  later  date. 

2  The  value  of  the  shares  of  the  subsidiaries  was  computed  by  the  Commer- 
cial and  Financial  Chronicle,  and  the  results  presented  in  the  form  of  a  table. 
See  vol,  93,  p,  1390  (November  18,  191 1). 


TRUST  DISSOLUTION  PROCEEDINGS  447 

(Upon  the  death  of  Mr.  Archbold  some  years  later  Mr.  Bedford 
became  president.)  Similar  shifts  affecting  other  positions 
were  made  at  the  same  time. 

What  has  been  the  effect  of  the  dissolution  decree?  For- 
tunately the  Federal  Trade  Commission,  which  was  empowered 
by  the  Trade  Commission  Act  to  investigate  the  manner  in 
which  the  dissolution  decrees  of  the  courts  have  been  carried 
out,  has  made  a  full  investigation  of  this  matter  so  far  as  gaso- 
line is  concerned.  Its  findings  of  fact  and  its  conclusions  are 
contained  in  its  Report  on  the  Price  of  Gasoline  in  iQi^. 

The  conclusion  of  the  Commission  was  that  in  spite  of  the 
dissolution  decree  there  was  little,  if  any,  competition  among 
the  former  subsidiaries  of  the  Standard  Oil  Company  of  New 
Jersey  in  the  marketing  of  gasoline,  now  the  chief  refined  product 
of  crude  oil.^  The  subsidiaries  which  were  engaged  in  marketing 
gasoline  were  the  Standard  Oil  companies  of  New  York,  New 
Jersey,  Kentucky,  Ohio,  Indiana,  Nebraska,  California,  and 
Louisiana,  the  Atlantic  Refining  Company,  the  Continental 
Oil  Company,  and  the  MagnoHa  Petroleum  Company.  The 
Commission  pointed  out  that  these  eleven  Standard  companies 
have  with  respect  to  gasoline  "maintained  a  complete  division 
of  territory  embracing  the  whole  country  and  that  almost  with- 
out exception  each  Standard  marketing  company  occupies  and 
supplies  a  distinct  and  arbitrarily  bounded  territory."  -  Thus, 
the  Standard  Oil  Company  of  New  York  occupied  the  whole  of 
New  York  state  and  the  New  England  states,  but  no  other  ter- 
ritory; the  Atlantic  Refining  Company  occupied  all  of  Pennsyl- 
vania and  Delaware,  but  no  part  of  any  other  state;  and  the 
Standard  Oil  Company  of  New  Jersey  served  New  Jersey,  Mary- 
land, Virginia,  West  Virginia,  North  Carolina,  and  South  Caro- 
lina.^ The  only  exceptions  to  this  division  of  territory  without 
any  overlapping  were  found  in  Oklahoma  and  Arkansas.     In 

1  Report  of  the  Federal  Trade  Commission  on  Price  of  Gasoline  in  191 5, 

pp.  7,  113- 

2  Ibid.,  p.  6. 

^The  details  are  shown  in  a  map  opposite  page  22  of  the  Report  of  the 
Commission. 


448        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Oklahoma— the  territory  of  the  Magnolia  Petroleum  Company 
—the  Standard  Oil  Company  of  Indiana  had  a  few  tank  wagon 
stations  in  the  northern  part  of  the  state;  and  in  Arkansas  both 
the  Magnolia  Petroleum  Company  and  the  Standard  Oil  Com- 
pany of  Louisiana  had  stations.  None  of  the  "independent" 
concerns,  it  should  be  observed,  had  marketing  territories 
limited  in  this  fashion.  The  Texas  Company,  for  example,  sold 
gasoline  in  32  states  and  the  District  of  Columbia,  and  covered 
ten  of  the  eleven  Standard  marketing  territories.  The  Gulf 
Refining  Company,  the  Indian  Refining  Company,  the  National 
Refining  Company,  the  Pure  Oil  Company,  and  the  Cudahy 
Refining  Company  all  did  business  in  at  least  two  of  the  Stand- 
ard marketing  territories,  and  were  able  to  make  profits  in  com- 
petition with  each  other  and  with  the  Standard  companies. 

Moreover,  the  boundaries  of  the  Standard  territories  were 
arbitrary.  Almost  without  exception  they  conformed  to  state 
lines.  And  of  course  it  is  clear  that  state  lines,  being  political 
boundaries,  do  not  represent  the  most  economical  boundaries 
from  the  standpoint  of  distribution.  Thus,  the  Standard  Oil 
Company  of  Ohio,  with  a  refinery  in  the  northern  part  of  the 
state,  supplied  the  southern  part  of  the  state,  in  spite  of  the  fact 
that  the  Standard  Oil  Company  of  New  Jersey  had  a  refinery 
at  Parkersburg,  West  Virginia,  just  across  the  border.  This 
division  of  territory,  obviously  uneconomical,  would  appear  to 
have  been  adopted  for  the  reason  that  such  a  division  offered 
no  opportunity  for  encroachment,  thus  avoiding  disputes. 

Further  evidence  of  the  absence  of  competition  between  the 
eleven  Standard  marketing  companies  was  given  by  the  marked 
unequalities  in  the  price  of  gasoline  in  one  territory  as  compared 
with  another.  The  report  gives  numerous  illustrations  of  these 
inequaUties,  but  it  suffices  to  say  that  they  cannot  be  explained 
on  the  ground  of  differences  in  the  cost  of  refining  or  of  distribu- 
tion. Had  competition  been  effective  these  inequahties  clearly 
could  not  have  persisted.  The  Standard  companies  in  low  price 
territories  would  have  made  sales  in  the  high  price  territories, 
and  as  a  result  there  would  have  been  eliminated  all  differences 
in  price  except  such  as  were  the  result  of  differences  in  cost.    It 


TRUST  DISSOLUTION  PROCEEDINGS  44^ 

is  true  that  some  Standard  marketing  concerns  did  make  ship- 
ments into  the  territory  of  other  Standard  concerns;  these  inter- 
territorial  shipments  amounted  in  1915  to  over  200,000,000  gal- 
lons. But  these  shipments  represented  sales  to  the  company 
whose  territory  was  "invaded,"  and  the  latter  was  therefore 
free  to  dispose  of  the  gasoline  as  its  own  product,  and  at  such 
prices  as  it  saw  fit.  Obviously  such  sales  had  no  tendency  to 
equalize  prices;  they  permitted  each  company  to  maintain 
the  monopoly  price  that  yielded  it  the  maximum  net  profit. 
And  this  they  were  enabled  to  do  by  virtue  of  the  dominant 
position  which  they  occupied  in  the  trade.  The  Commission 
estimated  that  the  Standard  companies  controlled  approximately 
65  per  cent  of  the  gasoline  business  throughout  the  United 
States.^  The  "independents"  thus  controlled  about  35  per 
cent;  yet  by  no  means  all  of  their  output  could  be  regarded  as 
competitive,  since  it  included  the  sales  of  companies,  such  as  the 
Tidewater  Oil  Company,  in  which  the  Standard  stockholders  had 
large  interests.  Moreover,  the  facts  seemed  to  show  that  though 
the  "independents"  competed  for  business,  they  followed  the 
prices  fixed  by  the  Standard  companies  in  the  several  marketing 
areas. 

The  explanation  of  the  lack  of  competition  among  the  Stan- 
dard marketing  companies,  according  to  the  Federal  Trade 
Commission,  was  to  be  found  in  the  fact  that  there  was  a  com- 
munity of  interest  among  these  companies  based  on  common 
stockholding.  This  community  of  interest,  it  should  be  noted, 
included  the  oil-producing,  pipe-line,  and  refining  companies, 
as  well  as  the  marketing  companies.  The  stockholder  lists  of  the 
Standard  companies  as  of  January,  191 5,  made  it  clear  that  al- 
though some  changes  in  the  personnel  of  the  stockholders  had 
taken  place  since  the  dissolution,  a  majority  of  the  stock  of  most 
of  the  companies  continued  to  be  held  by  the  same  small  group.^ 
For  example,  55  per  cent  of  the  stock  of  the  Atlantic  Refining 

1  Report  of  the  Federal  Trade  Commission  on  Price  of  Gasoline  in  1915, 
p.  143.    The  approximate  percentage  by  territories  is  shown  on  p.  144. 

2  See  Report  of  the  Federal  Trade  Commission  on  Price  of  Gasoline  in 
1915,  p.  145. 


450        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Company  was  held  by  the  comparatively  small  group  of  in- 
dividuals owning  300  shares  or  more  apiece;  and  this  same  group 
held  over  50  per  cent  of  the  stock  of  the  Prairie  Oil  and  Gas 
Company,  the  Prairie  Pipe  Line  Company,  the  Continental  Oil 
Company,  and  the  Standard  Oil  companies  of  New  Jersey,  New 
York,  Ohio,  Indiana,  Kentucky,  and  Nebraska.  (If  the  hold- 
ings of  less  than  300  shares  were  included,  the  percentage  of 
common  holding  would  amount  to  approximately  70  per  cent.) 
Moreover,  the  Standard  Oil  Company  of  New  Jersey  owned 
practically  all  of  the  stock  of  the  Standard  Oil  Company  of 
Louisiana  and  of  the  Carter  Oil  Company;  and  the  presidents  of 
the  Standard  Oil  Company  of  New  Jersey  and  the  Standard  Oil 
Company  of  New  York  owned  about  70  per  cent  of  the  stock  of 
the  Magnolia  Petroleum  Company.  A  community  of  interest 
among  the  eleven  Standard  marketing  companies  and  the  crude 
oil  and  pipe-line  companies  was  thus  established. 

In  addition,  the  leading  officers  and  directors  of  the  Standard 
companies  were  frequently  stockholders  in  several  companies. 
To  cite  one  instance,  the  president  of  the  Standard  of  New  Jer- 
sey owned  6,000  shares  (worth  $3,258,000  at  the  end  of  1915) 
in  his  own  company,  4,575  shares  (worth  $1,029,375)  in  the 
Standard  of  New  York,  1,858  shares  (worth  $1,012,610)  in  the 
Standard  of  Indiana,  1,100  shares  (worth  $480,150)  in  the 
Prairie  Oil  and  Gas  Company,  and  300  shares  (worth  $207,000) 
in  the  Atlantic  Refining  Company.  Such  common  stockhold- 
ings naturally  tended  to  restrain  competition  among  the  sepa- 
rate companies. 

The  conclusion  of  the  Commission  was  that  the  combination, 
which  was  supposed  to  have  been  disintegrated,  remained  a  com- 
bination in  fact,  if  not  in  law, — a  combination  based  on  a  com- 
munity of  interest,  which  in  turn  was  the  result  of  the  inter- 
ownership  of  stock.  ^  In  making  this  statement,  however,  the 
Commission  was  careful  to  say  that  it  did  not  charge  the  Stand- 
ard companies  with  violating  the  decree;  for  common  ownership 
was  not  prohibited  b^  the  dissolution  decree.    Neither  did  it  in- 

'  Report  of  the  Federal  Trade  Commission  on  Price  of  Gasoline  in  191 5, 
p.  158. 


TRUST  DISSOLUTION  PROCEEDINGS  45 1 

tend  to  criticise  the  decree  itself.  The  Standard  Oil  Company  be- 
ing the  first  important  trust  to  be  dissolved,  the  decree  was  more 
or  less  of  an  experiment.  But  it  was  the  dehberate  judgment 
of  the  Commission  that  the  experiment  of  dissolving  corpora- 
tions mthout  separating  owners  had  not  led  to  the  desired  re- 
sult, which  was  the  restoration  of  competition.  In  reply  to  the 
argument  that  some  time  in  the  future  a  redistribution  of  terri- 
tory might  be  brought  about  by  the  "operation  of  economic 
laws,"  the  Commission  said  that  there  was  not  sufficient  e\'i- 
dence  of  a  tendency  to  a  substantial  rearrangement  of  territory 
to  warrant  a  reliance  upon  time  and  the  laws  of  trade. 

The  Commission,  therefore,  in  accordance  with  the  duty 
imposed  upon  it  by  the  Trade  Commission  Act,  recommended 
that  Congress  enact  legislation  to  remedy  the  unfortunate  state 
of  affairs  thus  disclosed.  The  suggestions,  so  far  as  they  relate 
to  common  ownership,  were:  (i)  A  law  pro\iding  for  the  reopen- 
ing of  anti-trust  cases  on  the  application  of  the  Attorney  Gen- 
eral, for  the  purpose  of  securing  such  modifications  of  decrees  as 
new  conditions  might  require.  (2)  The  abolition  by  legislation, 
in  certain  cases,  of  common  stock  ownership  in  corporations 
which  have  been  members  of  a  combination  dissolved  under  the 
Sherman  Act,  when  these  companies  are  engaged  in  the  same 
line  of  commerce.  (3)  As  an  alternative  to  (2),  an  effective 
limitation  upon  common  ownership  of  stock  in  potentially  com- 
petitive corporations  by  \\ithdra\ving  the  power  of  voting  and 
control.  (4)  If  Congress  deemed  it  inadvisable  to  prevent  com- 
mon ownership,  with  its  almost  inevitable  restriction  of  compe- 
tition, the  Commission  recommended  the  enactment  of  legislation 
that  would  fix  upon  the  common  owners  of  stock  in  poten- 
tially competing  concerns  the  responsibility  for  such  acts  of  each 
of  these  concerns  as  resulted  in  the  prevention  of  competition. 
With  respect  to  the  pipe-lines,  the  Commission  urged  that  the 
best  policy  would  be  to  apply  the  principle  of  the  commodity 
clause,  and  segregate  the  ownership  of  the  pipe-Hnes  from  the 
other  branches  of  the  petroleum  industry.  This  would  involve, 
said  the  Commission,  a  prohibition  against  the  controlling  por- 
tion of  the  stock  of  any  pipe-line  company  engaged  in  interstate 


452        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

commerce  being  owned  by  individuals  or  corporations  that  were 
also  owners  of  crude  oil  or  refining  properties,  or  vice  versa. 

THE  TOBACCO  TRUST  ^ 

The  dissolution  of  the  tobacco  trust — the  next  trust  to  be 
dissolved — presented  a  much  more  difficult  problem  than  the 
dissolution  of  the  oil  trust.  As  the  Supreme  Court  had  pointed 
out,  a  mere  decree  forbidding  stock  ownership  by  one  part  of  the 
combination  in  another  part  thereof  would  not  afford  adequate 
relief,  since  there  would  still  remain  corporations  dominating 
various  branches  of  the  tobacco  business.  For  example,  to 
prescribe  that  the  American  Tobacco  Company  should  part  with 
its  control  of  the  American  Snuff  Company  would  not  fully  meet 
the  situation,  since  the  American  Snuff  Company  would  still 
dominate  the  snuff  branch  of  the  tobacco  business  in  violation  of 
the  anti-trust  act.  Again,  the  subtle  devices — to  use  the  Court's 
language — that  had  been  resorted  to  in  establishing  the  trust 
were  of  such  a  character  as  to  make  it  difficult,  if  not  impossible, 
to  formulate  a  remedy  that  would  restore  the  prior  lawful 
conditions.  In  view  of  this  situation  Justice  Harlan  recom- 
mended that  the  Supreme  Court  itself  frame  the  dissolution 
decree,  the  record  being  sufficiently  full,  in  his  opinion,  to  enable 
the  Court  to  formulate  a  plan.  But  the  Court  decided  otherwise. 
It  remanded  the  case  to  the  court  below,  and  directed  it  to  hear 
the  parties  "for  the  purpose  of  ascertaining  and  determining 
upon  some  plan  or  method  of  dissolving  the  combination  and  of 
recreating,  out  of  the  elements  now  composing  it,  a  new  condition 
which  shall  be  honestly  in  harmony  with  and  not  repugnant  to 
the  law.  "2 

In  view  of  the  complex  organization  of  the  tobacco  trust,  the 
Circuit  Court  would  have  found  its  task  sufficiently  difficult, 

lOn  the  dissolution  of  the  tobacco  trust  see  especially:  191  Fed.  Rep. 
371-431;  Report  of  the  Senate  Committee  on  Interstate  Commerce  on  the 
Control  of  Corporations,  1913,  pp.  315-350;  Report  of  the  Commissioner 
of  Corporations  on  the  Tobacco  Industry,  part  III;  Annual  Reports  of  the 
Attorney  General;  and  Muhse,  Political  Science  Quarterly,  28,  pp.  249-278, 

2  221  U.  S.  187. 


TRUST  DISSOLUTION  PROCEEDINGS  '     453 

even  had  the  Supreme  Court  in  other  cases  laid  down  the  rules 
of  dissolution.  But  except  for  the  simple  remedy  provided  in 
the  Standard  Oil  case — a  remedy  which  the  Supreme  Court  had 
declared  to  be  inadequate  in  the  tobacco  trust  case — there  were 
no  rules.  As  the  Circuit  Court  said,  "We  are  left  without  guide 
to  turn  a  condition  in  ^•iolation  of  the  law  into  a  condition 
honestly  in  harmony  with  it."  ^ 

The  Circuit  Court  approached  its  problem  by  instituting  a 
series  of  conferences  between  the  counsel  for  the  defendants 
and  the  counsel  for  the  government  (including  the  Attorney 
General),  in  order  that  a  preliminary  agreement  upon  the  disso- 
lution plan  might  be  had.  At  these  conferences,  held  in  the 
presence  of  at  least  two  members  of  the  Court  for  a  period  of 
two  months,  many  changes  in  the  plan  of  dissolution  suggested 
by  counsel  for  the  tobacco  trust  were  made  to  meet  the  objec- 
tions raised  by  the  Attorney  General.  When  affairs  had  finally 
reached  such  a  stage  that  the  differences  between  the  parties 
could  no  longer  be  adjusted,  the  Court  arranged  for  public  hear- 
ings upon  the  matters  yet  in  dispute;  and  at  these  hearings  out- 
side parties  were  given  an  opportunity  to  express  their  views. 
The  plan  proposed  by  the  American  Tobacco  Company,  modi- 
fied in  some  respects  as  the  result  of  these  hearings,  was  then 
unanimously  approved  by  the  four  circuit  court  judges,  and 
made  effective  by  a  decree,  entered  November  16,  191 1. 

At  these  public  hearings  other  plans  for  dissolving  the  trust 
were  presented, — plans  which  in  some  instances  differed  widely 
from  the  plan  of  the  defendants.  But  counsel  for  the  defendants 
declared  that  they  would  not  undertake  to  carry  out  any  of  these 
plans,  preferring  apparently  to  take  their  chances  at  receiver's 
sale.  The  Court  therefore  refused  to  consider  them.  It  held 
that  it  had  no  power  to  enforce  any  plan  of  readjustment  with- 
out the  cooperation  of  the  owners  of  the  property.-  Its  only 
recourse,  in  the  event  that  the  proposed  plan  did  not  meet  the 
requirements  laid  down  by  the  Supreme  Court,  or  in  the  event 
that  the  defendants  would  not  accept  such  modifications  as  the 
Court  might  require,  was,  it  said,  to  seize  the  property  and  sell 

1  191  Fed.  Rep.  386.  2  ibid.,  375. 


454       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

it  at  public  auction.  It  would  seem  that  if  there  was  merit  'lA 
these  proposals  of  the  outside  parties  the  Court  might  properly 
have  required  their  acceptance  by  the  defendants  as  a  condition 
of  obtaining  its  approval  of  the  plan;  for  the  Court  clearly  was 
under  no  obligation  to  approve  an  unsatisfactory  plan  merely 
because  the  refusal  of  the  defendants  to  accept  it  would  neces- 
sitate a  receiver's  sale.  Otherwise  the  Court  might  excuse  itself 
for  accepting  any  plan  proposed  by  the  defendants,  no  matter 
how  inadequate  it  might  be.  But  the  Court  apparently  held 
a  different  view. 

The  decree  in  the  tobacco  case  is  the  first  instance  in  which  a 
plan  for  the  dissolution  of  a  trust  was  elaborately  worked  out 
under  the  supervision  of  a  court;  and  it  therefore  deserves 
detailed  consideration.  It  is  believed,  however_,  that  the  details 
will  be  more  readily  understood,  if  the  leading  features  of  the 
plan  are  first  summarized. 

The  plan  of  dissolution  adopted  by  the  Court  provided  for  the 
division  of  the  business  of  the  trust  among  fourteen  separate 
companies.^  These  companies,  with  the  character  of  their 
business,  were  as  follows:  (i)  American  Tobacco  Company 
(general  tobacco  manufacturing  business,  except  snuff) ;  (2)  Lig- 
gett and  Myers  Tobacco  Company  (general  tobacco  manufac- 
turing, except  snuff) ;  (3)  P.  Lorillard  Company  (general  tobacco 
manufacturing,  except  snuff);  (4)  R.  J.  Reynolds  Tobacco 
Company  (general  tobacco  manufacturing,  except  snuff,  cigar- 
ettes, and  cigars) ;  (5)  Conley  Foil  Company  (tin  foil) ;  (6)  John- 
ston Tin  Foil  and  Metal  Company  (tin  foil);  (7)  MacAndrews 
and  Forbes  Company  (licorice  paste) ;  (8)  J.  S.  Young  Company 
(licorice  paste);  (9)  American  Snuff  Company  (snuflf);  (10) 
George  W.  Helme  Company  (snuff);  (11)  Weyman-Bruton 
Company  (snuff);  (12)  British-American  Tobacco  Company 
(general  tobacco  manufacturing  in  foreign  countries) ;  (13)  Porto 
Rican-American  Tobacco  Company  (cigars — Porto  Rican  and 
foreign);  (14)  United  Cigar  Stores  Company  (retail  tobacco 
business). 

The  distribution  of  assets  among  these  companies  (or  their 
1  The  decree  is  in  191  Fed.  Rep.  417-431. 


TRUST  DISSOLUTION  PROCEEDINGS  455 

stockholders),  when  the  distribution  took  the  form  of  stock,  was 
effected  by  requiring  the  corporation  owning  such  stock  to  dis- 
tribute it  to  its  own  stockholders.  For  example,  the  American 
Tobacco  Company  was  required  to  distribute  among  its  share- 
holders the  stock  which  it  held  in  the  American  Snuff  Company. 
The  result  was  to  vest  in  the  stockholders  of  the  American 
Tobacco  Company  the  control  formerly  exercised  by  the  Ameri- 
can Tobacco  Company  as  a  corporation.  The  distribution  of 
assets,  when  the  assets  were  in  the  form  of  plants,  was  effected  by 
requiring  the  dominant  concern  in  any  particular  branch  of  the 
business  to  transfer  a  part  of  its  factories  to  one  or  more  other 
concerns,  some  of  which  were  organized  for  the  express  purpose 
of  meeting  the  requirements  of  the  decree.  For  example,  the 
American  Tobacco  Company  was  compelled  to  transfer  some  of 
its  factories,  brands,  etc.,  to  the  Liggett  and  Myers  Tobacco 
Company,  a  newly  organized  concern.  The  stock  in  the  Liggett 
concern  received  by  the  American  Tobacco  Company  as  consid- 
eration for  the  transfer  was  then  turned  over  by  the  American 
Tobacco  Company  to  its  own  stockholders.  None  of  the 
fourteen  companies  was  allowed  to  hold  stock  in  any  of  the 
other  fourteen;  and  each  of  them,  together  with  the  individual 
defendants  in  the  suit,  v/as  enjoined  from  continuing  the  illegal 
combination,  or  effecting  a  new  one,  by  resort  to  a  number  of  acts 
specifically  dealt  with  in  the  decree  of  dissolution.  The  plan  was 
to  be  carried  into  effect  by  February  28,  191 2. 

In  a  more  detailed  consideration,  the  dissolution  decree  may 
be  described  under  the  following  headings:  I.  Abrogation 
of  the  domestic  and  foreign  restrictive  covenants;  II.  Dis- 
integration of  the  accessory  companies;  III.  Distribution 
by  the  American  Tobacco  Company  of  stocks  owned  or  to  be  ac- 
quired by  it;  IV.  Sale  by  the  American  Tobacco  Company  of 
manufacturing  assets  and  business;  V.  Injunctions. 

I.  Abrogation  of  the  Domestic  and  Foreign  Restrictive  Covenants 

In  acquiring  the  property  or  stock  of  competing  concerns  the 
tobacco  trust  had  frequently  stipulated  as  a  condition  of  the  pur- 
chase that  the  sellers  sign  an  agreement  not  to  reengage  in  the 


456       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

tobacco  business.  These  covenants  were  to  be  rescinded ;  and  the 
covenantors  were  thereafter  to  be  permitted  to  engage  in  any 
branch  of  the  business.  The  pooUng  agreement  of  September  27, 
1902,  under  which  the  American  Tobacco  Company  and  the 
Imperial  Tobacco  Company  had  combined  to  form  the  British- 
American  Tobacco  Company  was  also  to  be  cancelled. 

II.  Disintegration  of  the  Accessory  Companies 

The  five  companies  designated  by  the  Supreme  Court  as 
accessory  companies  (because  accessory  to  the  combination) 
were:  (i)  American  Snuff  Company;  (2)  MacAndrews  and 
Forbes  Company;  (3)  Conley  Foil  Company;  (4)  American 
Stogie  Company;  and  (5)  American  Cigar  Company.  The 
decree  dealt  specifically  with  each  of  these  companies. 

The  American  Snuff  Company  had  a  monopoly  of  the  manu- 
facture of  snuff;  in  19 10  it  produced  96.5  per  cent  of  the  total 
output.  By  the  decree  there  were  to  be  organized  two  new 
snuff  companies  (the  George  W.  Helme  Company  and  the 
Weyman-Bruton  Company),  and  to  these  new  companies  the 
American  Snuff  Company  was  to  turn  over  a  number  of  its 
factories  with  the  brands  manufactured  therein.  From  each  of 
these  corporations  the  American  Snuff  Company  was  to  receive 
$4,000,000  common  stock  and  $4,000,000  voting  preferred 
stock, — a  total  of  $16,000,000.  The  common  stock  of  these  two 
companies  the  American  Snuff  Company  was  to  distribute,  as  a 
dividend,  to  its  own  common  stockholders;  and  the  preferred 
stock  it  was  to  offer  at  par  to  its  preferred  stockholders  in  ex- 
change for  their  preferred  stock  in  the  American  Snuff  Company. 
As  by  this  process  of  exchange  the  American  Company  came  into 
possession  of  its  own  preferred  stock,  it  was  to  retire  it;  but  it 
was  not  to  use  the  preferred  stock  in  the  two  new  companies  that 
it  continued  to  hold,  because  of  the  failure  of  its  preferred  stock- 
holders to  make  the  exchange,  as  a  means  of  exercising  control 
over  their  operations.  In  any  event,  the  American  Snuff  Com- 
pany by  exchange  or  sale  was  to  dispose  of  the  preferred  stock  of 
the  two  new  companies  by  January  i,  191 5.  The  American 
Tobacco  Company  as  a  stockholder  in  the  American  Snuff  Com- 


TRUST  DISSOLUTION  PROCEEDINGS  457 

pany  would  of  course  receive  stock  in  the  Helme  Company  and 
the  Weyman-Bruton  Company;  but  this  stock,  as  well  as  its 
stock  in  the  American  Snuff  Company,  was  in  turn,  as  will  be 
pointed  out  shortly,  to  be  distributed  by  the  American  Tobacco 
Company  to  its  stockholders. 

The  disintegration  of  the  other  four  accessory  companies  fol- 
lowed substantially  this  plan,  though  provision  was  made  for  the 
dissolution  of  the  American  Stogie  Company.  Moreover,  in  the 
case  of  the  American  Cigar  Company,  the  American  Tobacco 
Company  continued  to  hold  control,  instead  of  being  compelled 
to  distribute  the  stock  of  this  company  to  its  own  shareholders, 
as  was  the  usual  arrangement. 

III.  Distribution  by  the  American  Tobacco  Company  of  Stocks 

Owned  or  to  be  Acquired  by  it 

The  dissolution  decree  as  thus  far  described  would  leave  the 
American  Tobacco  Company  in  possession  of  the  securities  of  a 
number  of  companies,  including  certain  ones  not  dissolved  by 
the  decree.^  But  these  stocks,  with  only  a  few  exceptions^  were 
to  be  disposed  of  by  the  American  Tobacco  Company,  some 
immediately,  and  the  remainder  by  January  i,  19 15.  Mean- 
while the  American  Tobacco  Company  was  not  to  attempt  to 
exercise  any  influence  or  control  over  these  companies. 

IV.  Sale  by  the  American  Tobacco  Company  of  Manufacturing 

A  ssets  and  Business 

The  American  Tobacco  Company,  even  after  it  had  disposed 
of  its  interest  in  the  snuff,  licorice,  and  tin  foil  companies  would 
still  be  an  illegal  combination  by  virtue  of  its  domination  of 

1  Particularly  the  R.  J.  Reynolds  Tobacco  Company,  the  British-American 
Tobacco  Company,  the  Porto  Rican-American  Tobacco  Company,  and  the 
United  Cigar  Stores  Company.  These  companies,  all  subsidiaries  of  the 
American  Tobacco  Company,  were  not  held  by  the  Supreme  Court  to  be 
illegal  in  themselves;  and  their  property  was  therefore  left  intact.  But  their 
domination  by  the  American  Tobacco  Company  was  held  illegal,  and  they 
Vere  therefore  detached  from  that  company  by  a  requirement  that  the 
American  Tobacco  Company  distribute  to  its  own  stockholders  its  holdings 
of  stocks  in  these  companies. 


458        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  cigarette,  plug,  smoking  tobacco,  fine-cut,  and  little  cigai 
branches.  It  was  therefore  necessary  to  transfer  a  part  of  these 
businesses  to  other  concerns.  The  decree  consequently  provided 
that  the  American  Tobacco  Company  should  give  to  its  common 
stockholders  the  stock  that  it  held  in  the  R.  J.  Reynolds  Tobacco 
Company, — a  concern  manufacturing  mainly  plug  tobacco,  but 
also  some  smoking  tobacco.  It  was  next  provided  that  two  new 
companies  be  organized — the  Liggett  and  Myers  Tobacco 
Company  and  the  P.  Lorillard  Company  ^ — and  to  these  com- 
panies the  American  Tobacco  Company  was  to  convey  numerous 
factories  and  brands,  including  raw  materials,  storage  houses, 
and  cash,  in  order  that  both  of  the  new  concerns  might  be  "fully 
equipped"  for  the  conduct  of  the  tobacco  business. 

The  properties,  brands,  and  good  will  to  be  conveyed  to  the 
Liggett  and  Myers  Tobacco  Company  were  valued  at  $67,447,- 
499;  and  those  to  be  conveyed  to  P.  Lorillard  Company  were 
valued  at  $47,552,501.  (The  American  Tobacco  Company 
would  be  left  with  assets  valued  at  $98,432,473.83,  upon  which 
its  earnings,  based  on  the  results  for  1910,  would  be  $11,369,809 
or  11.55  P^r  cent.)  Both  of  these  new  companies  were  to  pay  for 
the  properties  received  by  them  in  their  own  securities,  these 
securities  to  consist  of  7  per  cent  bonds,  5  per  cent  bonds,  7  per 
cent  preferred  stock,  and  common  stock.  These  securities, 
aggregating  $115,000,000,  and  constituting  practically  the  total 
capitalization  of  the  new  companies,  were  then  to  be  disposed  of 
by  the  American  Tobacco  Company,  some  by  March  1,1912,  the 
balance  within  three  years. 

V.  Injunctions 

The  defendants,  their  officers,  directors,  servants,  agents, 
and  employees  were  enjoined  from  continuing  the  illegal  com- 
bination, and  from  entering  any  similar  one,  the  effect  of  which 
would  be  to  restrain  interstate  or  foreign  commerce  in  tobacco  or 
its  products,  by  resort  to  any  of  the  follo%\ang  acts:  (i)  By  con- 

^  A  company  of  the  same  name  then  in  existence  was  to  be  wound  up,  and 
its  assets  delivered  to  the  new  company.  The  old  Liggett  and  Myers  concern 
had  been  dissolved  in  the  merger  of  1904, 


TRUST  DISSOLUTION  PROCEEDINGS  459 

\reying  the  factories,  brands,  or  business  of  any  of  the  fourteen 
corporations  among  which  the  properties  of  the  combination 
were  divided  to  any  other  of  these  corporations,  either  by  placing 
the  stocks  of  any  one  or  more  of  them  in  the  hands  of  voting 
trustees,  or  by  controUing  the  voting  power  of  these  stocks  by 
any  similar  device.  (2)  By  making  any  express  or  implied  agree- 
ment relative  to  the  control  of  any  of  the  fourteen  corporations, 
or  relative  to  the  purchase,  sale,  transportation,  or  manufacture 
of  tobacco  or  its  products  or  supplies,  which  would  have  a  like 
effect  in  restraint  of  commerce  to  that  of  the  combination,  the 
operation  of  which  had  been  enjoined;  or  by  making  any  arrange- 
ment of  any  kind  with  any  other  of  these  corporations  for  the 
apportionment  of  trade  among  them,  in  respect  either  to  cus- 
tomers or  locaHties.  (3)  By  any  two  of  the  fourteen  corpora- 
tions employing  the  same  clerical  organization  or  keeping  the 
same  offices.  (4)  By  any  of  the  fourteen  corporations  holding 
stock  in  any  other  corporation  any  part  of  the  stock  of  which 
was  also  held  by  any  other  of  these  corporations.^  (5)  By  any  of 
the  fourteen  corporations  doing  business,  directly  or  indirectly, 
under  any  other  than  its  corporate  name  or  the  name  of  a  sub- 
sidiary corporation  controlled  by  it;  pro\aded,  that  in  the  case 
of  a  subsidiary  company  the  controlling  corporation  should 
cause  the  products  of  the  subsidiary  to  bear  a  statement  indi- 
cating the  fact  of  such  control.  (6)  By  any  of  the  fourteen 
corporations  refusing  to  sell  to  a  jobber  any  brand  of  tobacco 
manufactured  by  it,  except  upon  the  condition  that  the  jobber 
should  purchase  from  the  seller  some  other  brand  or  product 
also  manufactured  by  it;  provided,  however,  that  this  pro- 
hibition should  not  be  construed  to  apply  to  what  were  known 
as  "combination  orders,"  under  which  a  brand  or  product 
might  be  offered  to  a  jobber  at  a  reduced  price,  on  condition 
that  he  purchase  a  given  quantity  of  some  other  brand  or 
product.^ 

^  Certain  minor  exceptions  were  allowed. 

2  This  proviso  was  inserted  by  the  Court  in  order  that  the  fourteen  corpo- 
rations might  not  be  estopped  from  employing  methods  of  business  which 
were  open  to  and  practiced  by  all  their  competitors.    191  Fed.  Rep.  3S1. 


46o       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

It  was  further  decreed  that  for  a  period  of  five  years  from  the 
date  of  the  decree  the  fourteen  corporations,  their  officers, 
directors,  etc.,  were  enjoined:  (a)  from  having  any  officers  or 
directors  in  common  ;  (b)  from  having  any  common  agents  for 
the  purchase  in  the  United  States  of  tobacco  leaf  or  other  raw 
material,  or  for  the  sale  in  the  United  States  of  tobacco  or  other 
products;  and  (c)  from  acquiring,  directly  or  indirectly,  stock 
in  any  other  of  the  fourteen  corporations,  or  from  acquiring 
their  factories,  brands,  or  business,  or  from  extending  them 
financial  aid. 

Finally,  each  of  the  twenty-nine  individual  defendants  was 
enjoined  during  a  period  of  three  years  after  the  date  of  the 
decree  from  holding,  directly  or  indirectly,  stock,  or  a  legal  or 
equitable  interest  in  stock,  in  any  one  of  the  fourteen  corpora- 
tions (except  the  British- American  Tobacco  Company),  in 
excess  of  the  amount  to  which  he  was  entitled  under  the  disso- 
lution plan;  provided,  however,  that  any  of  the  defendants 
might,  notwithstanding  this  prohibition,  acquire  from  other 
defefidanis,  or  from  their  estates  in  the  event  of  their  death, 
stock  held  by  such  defendants  in  any  of  the  fourteen  corpora- 
tions. 

Jurisdiction  of  the  case  was  retained  by  the  Circuit  Court 
in  order  that  it  might  be  in  a  position  to  issue  further  decrees, 
should  such  become  necessary  to  carry  out  the  mandate  of  the 
Supreme  Court.  But  the  jurisdiction  thus  retained  was  of  a 
limited  sort.  The  Attorney  General  had  requested  that  the 
Court  reserve  to  the  govermnent  the  right  at  any  time  within 
five  years  to  make  appHcation  for  further  relief,  if  it  appeared 
that  the  plan  of  dissolution  had  not  created  a  new  condition  in 
harmony  with  the  law.  But  the  Court  held  that  it  had  no  such 
power.  Had  it  not  been  for  the  mandate  of  the  Supreme  Court 
it  would  even  have  questioned  its  jurisdiction  to  recreate  a 
new  group  of  corporations  out  of  the  elements  into  which  the 
combination  had  been  spHt.  The  mandate  of  the  Supreme  Court 
had  settled  that  question,  it  said,  but  this  gave  no  warrant  for 
the  conclusion  that  the  lower  court  might  prescribe  the  tempo- 
rary terms  of  a  modus  vivendi,  with  power  subsequently  to  modify 


TRUST  DISSOLUTION  PROCEEDINGS  '     461 

these  terms. ^  The  request  of  the  government  was  therefore 
denied. 

The  plan  of  dissolution  as  just  outlined  was  thus  compre- 
hensive. By  many  it  was  hailed  as  a  great  triumph  for  the  gov- 
ernment; by  others  it  was  derided  as  a  farce.  The  former  view 
was  expressed  by  William  Howard  Taft,  formerly  a  judge  in  the 
federal  courts,  and  learned  in  the  law.  While  President  of  the 
United  States  he  said:  "I  venture  to  say  that  not  in  the  history 
of  American  law  has  a  decree  more  effective  for  such  a  purpose 
been  entered  by  a  court  than  that  against  the  Tobacco  Trust."  - 
On  the  other  hand,  Mr.  Louis  D.  Brandeis,  prior  to  his  appoint- 
ment to  the  Supreme  Court,  said  that  the  net  effect  of  the  dis- 
solution was  to  legaUze  a  combination  heretofore  illegal.^  He 
testified  before  a  Senate  Committee  in  December,  191 1,  that 
the  decree  of  the  court  was  regarded  as  a  "certificate  of  good 
character,"  and  that  the  plight  of  the  independent  tobacco  man- 
ufacturers was  worse,  in  his  opinion,  than  it  had  been  before.^ 
Mr.  Samuel  Untermyer,  a  well-known  New  York  lawyer,  in 
testimony  before  the  same  committee  referred  to  the  "pitiful 
and  himiiliating  fiasco  in  the  tobacco  case."  ^  In  his  opinion 
the  decree  was  "the  most  colossal  judicial  farce  ever  enacted."  ^ 

In  the  light  of  such  strong  language  it  is  fitting  to  examine 
the  objections  to  the  decree,  particularly  those  raised  by  counsel 
for  the  independent  tobacco  manufacturers.  Their  opinion  is 
especially  significant  in  view  of  the  fact  that  among  their  nimiber 
was  Mr.  Louis  D.  Brandeis,  who  was  later  appointed  to  the 
Supreme  Court  (1916),  and  who  might  be  expected  to  play  an 
important  part  in  the  ultimate  solution  of  the  larger  problem 
raised  by  this  case. 

The  Court  having  given  outside  parties  leave  to  be  heard  on 
the  plan  of  dissolution  proposed  by  the  American  Tobacco 

1 191  Fed.  Rep.  384. 

^Congressional  Record,  December  5,  1911,  p.  23. 

^World  To-Day,  21,  p.  1441  (December,  1911). 

*  Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  1255. 
6  Ibid.,  p.  181. 

*  Ibid.,  p.  206. 


462       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Company,  Messrs.  Louis  D.  Brandeis  and  Felix  H,  Levy,  as 
counsel  for  the  National  Cigar  Leaf  Tobacco  Association,  the 
Cigar  Manufacturers '  Association,  and  the  Independent  Tobacco 
Salesmen's  Association,  filed  a  statement  on  October  25,  191 1, 
three  weeks  before  the  decree  of  the  Court  was  entered,  criticis- 
ing the  plan  of  dissolution.^  In  view  of  the  fact  that  the  Court 
rejected  most  of  the  suggestions  made  in  this  brief,  this  criticism 
of  the  proposed  dissolution  would  likewise  apply  for  the  most 
part  to  the  court  decree  of  November  16.  In  those  instances  in 
which  this  is  not  true,  that  is,  where  the  Court  admitted  the 
force  of  the  criticism  and  revised  the  decree  accordingly,  the 
fact  will  be  stated. 

According  to  the  brief  filed  by  Messrs  Brandeis  and  Levy,  the 
plan,  if  approved,  would  result  in  legalizing  monopoly,  instead 
of  restoring  competition.^  The  plan,  they  held,  contained  five 
fundamental  defects,  each  so  serious  as  to  furnish  in  itself 
sufficient  ground  for  the  rejection  of  the  plan.  These  defects 
were  classified  under  the  following  headings:  I.  Common  owner- 
ship; II.  Dominating  concerns;  III.  Completely  equipped 
concerns;  IV.  Restraints  on  unfair  competition;  V.  United 
Cigar  Stores  Company. 

I.  Common  Ownership 

The  main  objection  to  the  plan  was  the  common  owner- 
ship of  the  leading  concerns  into  which  the  trust  was  split. 
This  common  ownership  resulted,  of  course,  from  the  distribu- 
tion by  the  American  Tobacco  Company  to  its  own  stockholders 
of  the  securities  which  it  had  formerly  held.  By  this  distribu- 
tion the  control  which  had  been  exercised  by  the  American 
Tobacco  Company  in  its  corporate  capacity  was  transferred 
to  its  own  stockholders.  It  is  true  that  the  control  was  by  no 
means  as  concentrated  as  before.  Prior  to  the  dissolution  the 
twenty-nine  individual  defendants  had  owned  about  56  per 
cent  of  the  common  stock  of  the  American  Tobacco  Company, 

1  Given  in  full  in  Report  of  the  Senate  Conamittee  on  Control  of  Corpora- 
tions, pp.  315-322. 

2  Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  315. 


TRUST  DISSOLUTION  PROCEEDINGS  463 

which,  in  view  of  the  fact  that  the  preferred  stock  carried  no 
voting  power,  gave  them  control  of  the  Combination.^  But  by 
the  dissolution  decree  the  preferred  stock  was  given  voting  privi- 
leges. And  since  the  preferred  stock  exceeded  the  common 
stock  in  amount,  and  since  the  individual  defendants  held  a 
decidedly  lower  percentage  of  the  preferred  stock  than  of  the 
common,  the  result  was  that  they  received  an  average  of  only 
35  per  cent  of  the  voting  stock  in  the  fourteen  corporations. 
But,  as  counsel  for  the  independents  pointed  out,  the  individual 
defendants  held  a  sufficiently  large  minority  interest  to  control 
all  the  separate  companies,  providing  the  majority  stockholders 
did  not  unite  against  them.  And  in  view  of  the  past  affiliations 
of  these  stockholders  such  united  action  on  the  part  of  the 
majority  was  improbable.  Counsel  therefore  insisted  that  the 
proposed  plan  would  not  be  effective  to  restore  competition, 
since  it  did  not  provide  that  the  separate  corporations  which 
were  to  continue  the  business  of  the  trust  should  at  the  outset 
and  for  a  limited  period  thereafter  be  owned  by  absolutely 
distinct  groups  of  individuals. 

With  respect  to  the  first  argument,  the  Court  conceded  that 
the  defendants,  though  holding  only  a  minority  interest,  might 
control  the  fourteen  companies.  But  it  held  that  it  had  done  its 
duty  if  it  saw  to  it  that  the  legal  control  of  the  corporations 
was  taken  out  of  the  hands  of  the  defendants.^  The  Court 
did  not  feel  that  it  was  called  upon  to  guard  against  the  possible 
failure  of  the  majority  to  exercise  its  power.  With  respect  to  the 
argument  that  whenever  there  existed  common  stockholding 
there  would  be  no  real  competition,  the  Court  held  that  since 
the  Supreme  Court  in  both  the  Northern  Securities  and  Stand- 
ard Oil  cases  had  not  indicated  disapproval  of  a  method  of 
disintegration  that  left  the  separate  concerns  into  which  these 
combinations  were  divided  in  the  hands  of  the  same  body  of 
stockholders,  the  question  as  to  whether  common  stockholding 
was  repugnant  to  the  law  had  been  settled  for  it  by  controlHng 

^  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  III,  p.  213. 

2 191  Fed.  Rep.  388.    Italics  supplied  by  the  author. 


464       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

authority.^  It  is  true,  said  the  Court,  that  the  highest  tribunal 
in  deciding  these  cases  did  not  discuss  the  question  of  "common 
ownership,"  but  its  existence  in  both  cases  was  so  plainly  man- 
ifest that  it  was  difficult  to  understand  how  the  Court  could 
have  approved  of  the  new  arrangement,  unless  it  was  satisfied 
that  it  did  not  contain  the  same  vice  as  the  one  which  had  been 
declared  illegal.  The  government  also  seemed  to  hold  this  view, 
said  the  Court,  for  it  did  not  discuss  common  stockholding. 

II.  Dominating  Concerns 

The  next  objection  to  the  plan  was  that  it  created  a  few 
dominating  concerns.  The  four  corporations  that  were  to  con- 
duct the  cigarette,  plug,  smoking,  fine-cut,  and  little  cigar  busi- 
ness of  the  trust  were  given  such  a  large  percentage  of  the 
country's  trade  in  each  of  these  lines  as  to  enable  them,  it  was 
claimed,  to  dominate  the  independents,  whether  planters,  manu- 
facturers, or  dealers,  and  thus  unreasonably  to  restrain  trade. 

The  distribution  of  the  tobacco  business  among  the  various 
concerns  as  of  19 10  is  given  in  a  table  reproduced  in  the  decision 
of  the  court.-  This  table  shows  that  the  cigarette  business  of  the 
trust  was  divided  among  three  concerns,  which  would  produce, 
on  the  basis  of  the  figures  for  1910, 33.15  per  cent,  21.03  per  cent, 
and  26.02  per  cent,  respectively,  in  value,  of  the  entire  cigarette 
business  of  the  country.  And  the  distribution  of  brands  of 
cigarettes  among  the  three  "colorable"  competitors  was  such, 
counsel  alleged,  that  each  of  them  would,  as  against  the  other 
two,  dominate  a  particular  branch  of  the  tobacco  trade.  The 
combined  independent  production,  on  the  other  hand,  was 
only  19.80  per  cent,  or  less  than  that  of  either  of  the  three 
dominating  companies.  Mr.  Brandeis  held  that  the  cigarette 
business  of  the  trust,  representing  the  absorption  of  eighteen 
separate  concerns,  should  have  been  divided  among  at  least 
seven  separate  companies,  instead  of  among  only  three. 

The  smoking  tobacco  business  of  the  trust  was  divided  among 

1  191  Fed.  Rep.  375-376.    But  see  U.  S.  v.  Union  Pacific  Railroad  Com- 
pany, 226  U.  S.  470,  where  the  Supreme  Court  took  a  dilTerent  view. 
2 191  Fed.  Rep.  411. 


TRUST  DISSOLUTION  PROCEEDINGS  465 

four  companies,  producing  40.53  per  cent,  16.47  P^^  cent,  18.88 
per  cent  and  2.73  per  cent,  respectively,  of  the  total  value  of  the 
smoking  tobacco  output.  The  combined  independent  output 
was  only  21.39  P^r  cent,  or  about  half  that  of  the  American 
Tobacco  Company,  and  only  slightly  larger  than  that  of  the  two 
other  leading  producers.  Counsel  for  the  independents  main- 
tained that  the  smoking  tobacco  business  of  the  trust,  the  result 
of  combining  fifty-seven  separate  businesses,  should  have  been 
divided  among  at  least  twelve  concerns. 

It  is  not  necessary  to  carry  this  analysis  through  every  branch 
of  the  industry;  yet  attention  should  be  called  to  the  position  of 
the  independents  in  the  little  cigar  business.  The  Liggett  and 
Myers  Tobacco  Company  was  given  43.78  per  cent  of  the  output 
(not  value)  of  little  cigars,  whereas  the  combined  independent 
production  amounted  to  only  6.95  per  cent.  It  was  thus  to  be 
expected  that  the  Liggett  and  Myers  Company  would  do  a 
business  six  times  greater  than  that  of  the  independents.  Yet 
this  could  hardly  have  been  avoided.  The  Liggett  and  Myers 
output  of  little  cigars  consisted  of  only  a  single  brand,  and  it  is 
difficult  to  see  how  this  could  have  been  divided.^  This  illustra- 
tion goes  to  show  how  the  Combination's  policy  of  concentrating 
on  a  few  leading  brands  rendered  more  difficult  the  framing  of  an 
effective  plan  of  dissolution.  Any  company  which  received  one 
of  these  principal  brands  would  of  necessity  have  a  large  propor- 
tion of  the  total  trade  in  that  branch.  In  the  cigar  business,  as 
distinguished  from  the  little  cigar  business,  the  situation  was 
different.  The  Combination,  for  reasons  pointed  out  elsewhere,^ 
had  never  been  able  to  dominate  the  cigar  branch.  The  inde- 
pendents thus  continued  to  retain  the  ascendancy,  producing 
86.64  per  cent  of  the  total  output. 

Objection  was  also  made  to  the  dominant  position  given  to 
the  licorice  and  tin  foil  companies.  The  MacAndrews  and 
Forbes  Company,  a  majority  of  the  stock  of  which  had  been 
owned  by  the  American  Tobacco  Company,  produced  prior  to 

^  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  III,  p.  215. 
^ See  p.  132. 


466     THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  dissolution  about  90  per  cent  of  the  Hcorice  paste  manufac- 
tured in  the  United  States.^  By  the  decree  it  was  forced  to  turn 
over  its  Baltimore  plant  to  a  new  company,  but  this  still  left  it, 
according  to  Mr.  Brandeis,  60  per  cent  of  the  Ucorice  paste  busi- 
ness of  the  country.  Does  this  mean  that,  in  the  opinion  of  the 
Circuit  Court,  the  control  of  60  per  cent  of  the  supply  of  a  com- 
modity is  legal  under  the  Sherman  Act? 

III.  Completely  Equipped  Concerns 

The  decree  provided  that  the  two  new  companies  which 
received  a  part  of  the  manufacturing  properties  of  the  American 
Tobacco  Company— Liggett  and  Myers,  and  P.  Lorillard— 
should  be  "fully  equipped  for  the  conduct  of  the  business  of 
manufacturing  and  dealing  in  tobacco."  ^  Mr.  Brandeis  claimed 
that  no  independent  concern  was  "completely  equipped  for  the 
conduct  of  a  large  tobacco  business";  and  that  no  plan  to  restore 
competition  would  prove  effective  which  did  not  ensure  that  the 
several  concerns  that  were  to  continue  the  business  formerly 
done  by  the  trust  were,  at  the  outset,  of  a  character  similar  to 
the  independent  concerns.  The  American  Tobacco  Company, 
for  example,  was  given  a  cigarette  department  with  33.15  per 
cent,  in  value,  of  the  whole  cigarette  business  of  the  country,  a 
smoking  department  with  40.53  per  cent  of  the  country's  total, 
a  plug  department  with  22.98  per  cent,  etc.  Its  business  ex- 
tended over  nearly  every  branch  of  the  tobacco  trade;  in  each 
branch  it  had  a  large  percentage  as  compared  with  any  independ- 
ent concern;  and  it  was  to  receive,  with  Liggett  and  Myers,  and 
P.  Lorillard,  brands  of  tobacco  practically  indispensable  to  the 
successful  conduct  of  the  jobbing  or  retail  business.  By  means  of 
these  "  indispensable  brands"  it  would  be  able,  it  was  alleged,  to 
compel  dealers  to  give  preference  to  its  other  products  as  against 
the  products  of  independents;  and  the  large  profits  on  these 
indispensable  brands  could  be  used  to  crush  the  independents  in 
the  branches  in  which  they  competed.  It  was  therefore  urged 
that  no  concern  taking  over  any  part  of  the  cigarette  business  of 

'  191  Fed.  Rep.  394.  "^  Ibid.,  424. 


TRUST  DISSOLUTION  PROCEEDINGS  467 

the  trust  should  be  given  any  of  the  smoking  tobacco,  plug,  or 
cigar  business. 

On  this  matter  the  Court  said:  "Manifestly  the  minuter  the 
fragments  into  which  the  old  combination  is  split,  and  the  more 
they  are  prohibited  from  conducting  business  as  other  companies 
are  free  to  conduct  it,  the  less  will  be  their  ability  to  compete  with 
such  other  companies.  This  whole  line  of  argument  deals  with 
the  economics  ^  of  the  tobacco  business.  No  doubt  the  novel 
problem  presented  to  this  court  is  connected  with  questions  of 
economics  as  well  as  with  questions  of  law.  But  this  is  a  court  of 
law,  not  a  commerce  commission,  and  the  legal  side  of  the  propo- 
sition would  seem  to  be  the  controlling  one."  "  Judge  Lacombe 
then  went  on  to  say  that  the  true  way  to  approach  the  problem 
would  be  to  consider  whether  a  group  of  companies,  organized 
as  these  fourteen  corporations  were,  and  enjoined  as  they  were  by 
the  decree,  would  be  held  by  the  Supreme  Court  to  be  repugnant 
to  the  law.  And  his  conclusion  from  a  study  of  the  Standard  Oil 
and  Tobacco  decisions  was  that  the  Court  would  not  find  them 
to  be  in  violation  of  the  Sherman  Act. 

IV.  Restraints  on  Unfair  Competition 

The  brief  filed  by  Messrs  Brandeis  and  Levy  objected  to  the 
plan  because  it  contained  no  injunction  against  those  methods 
of  unfair  competition  by  means  of  which  the  trust  in  the  past 
had  destroyed  its  competitors.  This  defect,  however,  was 
remedied;  the  Court,  as  was  pointed  out  in  the  section  on  Injunc- 
tions, enjoined  the  defendants  against  a  continuance  of  the 
illegal  combination,  a  ad  enumerated  certain  acts  that  were 
specifically  prohibited.  Certain  requests  of  the  independents, 
however,  were  denied  by  the  Court.  These  requests  (in  part) 
and  the  Court's  replies  were:  ^  (i)  That  each  of  the  fourteen  cor- 
porations be  restrained  "from  espionage  on  the  business  of  any 
competitor  either  through  bribery  of  any  agent  or  employee  of 
such  competitor,  or  obtaining  information  from  any  United 

^  Italics  supplied  by  the  author. 

^  191  Fed.  Rep.  376. 

3  Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  320, 


468       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

States  revenue  ofificial."  The  Court  said  that  it  failed  to  see  why 
a  corporation  could  not  legitimately  obtain  from  private  or  pub- 
lic sources  information  as  to  the  business  of  a  competitor,  and 
when  illegitimate  methods  were  proved,  they  might  be  dealt 
with.^  (2)  That  the  fourteen  corporations  be  restrained  "from 
giving  away,  selling  at  or  below  the  cost  of  manufacture  and 
distribution,  any  of  its  products,  or  adopting  any  other  method 
of  cutthroat  competition  for  the  purpose  of  destroying  or  of  ac- 
quiring the  business  or  trade  of  a  competitor,"  and  (3)  "  from 
refusing  to  sell  to  any  jobber  any  brand  of  snuff  or  cigarettes  or 
smoking  or  chewing  tobacco  manufactured  by  it  which  is  indis- 
pensable in  the  particular  market.  It  should  also  be  restrained 
from  giving  any  rebates,  allowances,  or  other  special  induce- 
ments to  those  who  use  its  goods  exclusively  or  give  preference 
to  them  over  the  goods  of  competitors."  The  Court  refused 
both  of  these  requests.  It  pointed  out  that  these  were  common 
methods  in  the  tobacco  trade,  practiced  by  all  alike.  Only  by  the 
giving  away  of  samples,  or  by  the  offering  of  very  favorable 
terms,  could  new  brands  be  introduced,  or  old  brands  be  ex- 
tended into  new  territory.  These  methods  being  employed  by 
the  other  companies,  and  being  obnoxious  to  no  statute,  there 
was  no  reason,  so  the  Court  said,  why  the  fourteen  corporations 
should  be  enjoined  against  their  use.-  (4)  That  "  every  independ- 
ent or  other  person  interested  should  in  the  event  of  any  alleged 
violation  of  the  injunction  have  liberty  to  apply  to  the  court  for 
protection  and  such  action  as  may  appear  to  be  appropriate." 
The  Court  denied  this  request  from  a  fear  that  it  would  be  over- 
whelmed with  a  multitude  of  applications,  mainly  frivolous.  It 
held  that  any  one  who  felt  that  he  had  a  grievance  should  take 
the  complaint  to  the  Attorney  General,  who,  if  he  found  sub- 
stance in  it,  could  bring  it  before  the  Court. ^ 

V.  United  Cigar  Stores  Company 

The  dissolution  plan  provided  that  the  United  Cigar  Stores 
Company  should  be  left  intact,  but  that  the  American  Tobacco 

1  191  Fed.  Rep.  381.  ^  Ibid.  '  Ibid.,  382. 


TRUST  DISSOLUTION  PROCEEDINGS  '    469 

Company  should  distribute  its  stock  in  this  company  among  its 
own  stockholders.  Mr.  Brandeis  declared  that  the  power  of  the 
United  Cigar  Stores  Company  was  so  great  that  its  continued 
existence  would  render  effective  competition  improbable,  even 
if  the  manufacturing  properties  of  the  trust  were  divided  among 
companies  having  different  stockholders.  He  held  that  the  prop- 
erty and  business  of  this  company  ought  to  be  distributed  among 
at  least  ten  separate  corporations,  each  with  a  different  set  of 
stockholders,  and  none  with  a  predominant  power  in  any  locality. 
The  Court,  however,  refused  to  grant  this  relief.  It  pointed  out 
that  the  Attorney  General  had  not  requested  it.  All  that  the 
Attorney  General  urged  was  that  the  stock  of  the  United  Cigar 
Stores  Company  be  distributed  by  means  of  a  sale  to  others  than 
the  twenty-nine  individual  defendants  or  the  remaining  stock- 
holders of  the  American  Tobacco  Company,  in  order  that  the 
company  might  be  separated  entirely  from  the  rest  of  the  four- 
teen corporations.  But  the  Court,  so  it  held,  was  without  power 
to  grant  even  this  request.^  The  United  Cigar  Stores  Company 
therefore  was  left  undisturbed. 

This  review  of  the  defects  of  the  plan  of  dissolution  shows  that 
there  is  grave  doubt  whether  a  new  condition  honestly  in  har- 
mony with  the  anti-trust  law  was  in  fact  created.  It  was  there- 
fore eminently  desirable  that  the  matter  should  go  to  the  Sup- 
reme Court  for  its  approval  or  disapproval.  But  unfortunately 
there  was  no  way  whereby  it  could  reach  the  Supreme  Court,  so 
long  as  the  lower  court  and  the  two  parties  to  the  suit  were 
satisfied.  Counsel  for  the  independents  had  endeavored  to  se- 
cure the  insertion  in  the  decree  of  a  clause  directing  the  submis- 
sion of  the  plan  to  the  Supreme  Court  for  review,  but  the  Attor- 
ney General  had  objected,  and  the  request  was  denied.-  Upon 
the  rendering  of  the  decree  the  independents  appealed  to  the 
Supreme  Court  for  a  review  of  the  order  of  the  lower  court,  but 
this  was  refused  on  December  11,  1911.^  The  Sherman  Act 
contains  no  provision  whereby  parties  other  than  the  Attorney 

^  191  Fed.  Rep.  383. 

"^  Report  of  the  Senate  Committee  on  Control  of  Corporations,  p.  357. 

^  Chron.,  93,  p.  1670  (December  16,  1911). 


470       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

General  who  brought  the  suit  can  intervene,  and  necessarily 
therefore  the  petition  of  the  independents  was  denied  by  the 
Supreme  Court.  Subsequently  (April,  191 2)  the  Senate  passed 
a  bill  directing  the  Attorney  General  to  appeal,  but  this  measure 
was  not  acted  upon  in  the  House.  Clearly  this  outcome  of  the 
whole  affair  is  unfortunate.  The  lower  courts  have  been  re- 
versed so  frequently  by  the  Supreme  Court  on  difficult  questions 
of  law  that  a  final  settlement  of  this  matter  by  our  highest  court 
should  have  been  had,  particularly  in  view  of  the  many  other 
trust  cases  on  the  Court's  docket.  The  failure  of  Congress  to  pass 
the  bill  might,  moreover,  be  reasonably  regarded  as  having  given 
the  fourteen  corporations  vested  rights,  since  they  were  reor- 
ganized in  accordance  with  a  court  decree. 

No  complete  investigation  of  the  effects  of  the  dissolution 
decree  has  yet  been  made.  The  Bureau  of  Corporations  pub- 
lished in  1915  a  report  on  prices,  costs,  and  profits  in  the  tobacco 
industry,  in  which  it  compared  the  prices,  costs,  and  profits  of  the 
Combination  from  1893  to  1910  with  those  of  the  successor  com- 
panies from  i9i2toi9i3.^  But  the  Bureau  did  not  go  into  the 
other  matters  that  bore  on  the  effectiveness  of  the  dissolution, 
for  the  reason  that  the  Department  of  Justice  was  then  making 
an  investigation  of  the  manner  in  which  the  decree  was  being  ob- 
served. Moreover,  the  report  did  not  cover  the  accessory  com- 
panies (those  manufacturing  tin  foil,  licorice,  etc.),  the  domestic 
retail  business,  nor  the  foreign  business.  It  was  limited  to  the 
successor  companies,  which  included  the  American  Tobacco 
Company,  the  Liggett  and  Myers  Tobacco  Company,  the  P. 
Lorillard  Company,  the  R.  J.  Reynolds  Tobacco  Company,  the 
American  Snuff  Company,  the  George  W.  Helme  Company,  and 
the  Weyman-Bruton  Company. 

The  report  of  the  Bureau,  though  incomplete,  gave  certain 
data  significant  in  this  connection.^  (i)  The  report  showed 
that  the  successor  companies  did  a  slightly  larger  percentage 

^  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  III. 

^  For  the  conclusions  of  the  Bureau  as  to  the  effect  of  the  dissolution  on 
manufacturing  and  selling  costs,  see  pp.  147  seq. 


TRUST  DISSOLUTION  PROCEEDINGS 


471 


of  the  tobacco  business  of  the  country  than  did  the  trust  which 
preceded  it.    This  is  indicated  by  the  table  below.  ^ 


Branch 

Proportion  manufactured 
by  the  trust  in  igio 

Proportion  manufactured 

by  the  successor  companies 

in  igij 

Plug 

Little  cigars 

Smoking 

845 
91.4 
76.1 
79-7 
839 
96-5 

84.7 
91.0 

73-4 
77.  2 

Fine-cut 

Cigarettes 

Snufif 

90.7 
97-3 

From  this  table  it  appears  that  the  percentage  of  the  successor 
companies  in  the  plug  branch  increased  slightly,  while  their 
percentage  of  the  little  cigar  branch  declined  slightly,  as  com- 
pared with  the  business  of  the  trust  in  1910.  In  the  smoking 
and  fine-cut  branches  there  was  a  more  noticeable  decrease  in 
the  proportion  of  the  country's  output  controlled  by  the  suc- 
cessor companies.  But  the  control  over  the  cigarette  branch 
was  much  increased.  Whereas  the  trust  had  controlled  only  83.9 
per  cent  of  the  cigarette  business  in  1910,  the  successor  compan- 
ies in  1913  controlled  90.7  per  cent.  Both  the  American  Tobacco 
Company  and  the  Liggett  and  Myers  concern  sold  in  19 13 
about  seven  times  as  many  cigarettes  as  the  five  largest  manu- 
facturers in  the  country  other  than  the  successor  companies.- 
And  in  snuff  the  high  degree  of  monopolistic  control  possessed 
by  the  trust  was  further  increased.  The  three  successor  com- 
panies in  1913  produced  97.3  per  cent  of  the  total  output,  a 
close  approach  to  the  complete  elimination  of  the  independent 
element.  And  even  if  these  three  companies  had  been  required 
to  have  separate  stockholders,  as  was  urged  by  the  independents, 
competition  among  them  would  have  been  unlikely.  This  was 
because  the  division  of  brands  under  the  dissolution  decree 
gave  each  of  them  a  practical  monopoly  in  a  distinct  sales  terri- 

1  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industrj-, 
part  III,  p.  II. 

2  Ibid. 


472       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

tory,  thus  effecting  a  practical  division  of  the  field. ^  As  a  result, 
the  Bureau  reported,  competition  among  them  was  inactive; 
and  profits  were  higher,  and  selUng  costs  lower,  than  in  any  other 
branch  of  the  tobacco  industry. 

(2)  The  report  showed  that  in  most  branches  of  the  tobacco 
business  the  output  of  the  successor  companies  was  divided 
among  them  more  evenly  in  1913  than  it  had  been  directly  after  . 
the  dissolution.^  In  other  words,  the  successor  companies  with 
a  high  percentage  of  a  particular  branch  had  lost  ground  rela- 
tively to  the  successor  companies  with  a  lower  percentage  of  that 
branch.  A  marked  exception  was  the  Liggett  and  Myers  con- 
cern in  its  plug  business.  This  company  was  given  (by  the  dis- 
solution decree)  33.83  per  cent  of  the  total  output  of  plug 
tobacco;  but  by  1913  its  percentage  had  increased  to  over  40 
per  cent  of  the  total. "^ 

(3)  The  report  showed  that  such  competition  as  there  was 
among  the  successor  companies  largely  took  the  form  of  greatly 
increased  advertising  expenditures,  extension  of  sales  terri- 
tories, and  an  attempt  to  fill  in  the  gaps  in  their  business  in 
which  they  were  weak.^ 

(4)  Finally,  the  report  brought  out  that  there  had  been  no 
decided  changes  in  prices  to  the  jobbers  or  to  the  consumers 
since  the  dissolution  of  the  trust.^  These  facts,  taken  in  con- 
junction with  the  large  profits  realized,  show  that  such  compe- 
tition as  took  place  did  not  manifest  itself  in  prices.  This 
absence  of  competition  in  prices  was  to  be  explained  in  part  by 
the  price  making  conditions  of  the  tobacco  trade,  and  in  part 
by  statutory  provisions.  Tobacco  products  at  that  time  were 
nearly  always  sold  at  retail  at  five  cents  per  package,  or  some 
multiple  of  five  cents.  Had  the  jobber  reduced  the  price  to 
the  retailer,  the  effect  in  most  cases  would  have  been  merely  to 

'  Report  on  the  Tobacco  Industry,  part  III,  p.  14. 
2 Ibid.,  p.  II. 

2  Calculated  from  data  in  the  Report  on  the  Tobacco  Industry,  part  III, 
pp.  221-222. 

■*  Report  on  the  Tobacco  Industry,  part  III,  pp.  13-14- 
^  Ibid.,  p.  23. 


TRUST  DISSOLUTION  PROCEEDINGS  473 

increase  the  retailers'  profit  without  afifecting  the  price  at  which 
he  would  have  sold  to  the  consumer.    And  though  a  reduction 
in  the  price  to  the  jobber  on  any  particular  brand  might  have 
caused  the  jobber  to  push  the  article  more  energetically,  it  was 
generally  more  profitable  for  the  manufacturer  to  maintain  the 
price  to  the  jobber,  and  to  force  him  to  buy  by  means  of  elabo- 
rate advertising,  which  created  a  demand  on  the  part  of  the 
consumer,  and  thus  compelled  the  retailer  and  the  jobber  to  buy 
the   advertised  article.     Not\nthstanding   the   foregoing   con- 
siderations a  reduction  in  prices  might  have  taken  place  through 
the  selling  of  a  larger  package  for  the  same  price.    This,  however, 
did  not  occur,  except  in  rare  instances,  being  prevented  by  the 
statutory  provisions  fixing  the  size  of  packages.    To  illustrate, 
the  law  provided  that  smoking  tobacco  might  be  put  up  in  pack- 
ages of  one-half  an  ounce,  three-quarters  of  an  ounce,  one  ounce, 
etc.,  up  to  four  ounces.    The  leading  size  as  a  matter  of  fact  was 
the  two  ounce  package,  which  for  high  grade  smoking  tobacco 
generally  retailed  at  10  cents,  or  80  cents  per  pound.    Had  a 
manufacturer  competing  for  business  desired  to  increase  the 
size  of  his  package  he  would  have  been  forced  to  increase  it  to 
two  and  one-quarter  ounces.    This,  if  sold  at  10  cents  per  pack- 
age, would  be  at  the  rate  of  71.1  cents  per  pound.    The  manu- 
facturer, if  he  desired  to  charge  the  jobber  the  same  price,  would 
thus  receive  8.9  cents  less  per  pound;  and  this  he  could  not 
afford  to  do,  since  no  important  brand  of  smoking  tobacco  sold 
by  any  of  the  successor  companies  in  19 13  yielded  a  net  profit 
of  this  amount.^    Obviously,  therefore,  no  increase  in  the  size 
of  the  package  was  possible  as  matters  then  stood.    This  condi- 
tion, it  may  be  observed,  held  good  for  all  tobacco  products 
except  those  put  up  in  the  larger  packages,  that  is,  those  over 
four  ounces  (these  formed  but  a  small  percentage  of  the  total 
sales),  and  except  for  plug  tobacco,  which  the  manufacturer 
and  the  retailer  were  practically  free  to  sell  in  any  size  that  they 
chose.    Therefore,  without  further  legislation  permitting  smaller 
differences  in  the  size  of  the  package  than  one-quarter  of  an 
ounce,  or  permitting  all  tobacco  products  to  be  packed  and 
1  Report  on  the  Tobacco  Industry,  part  III,  p.  24. 


474       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

stamped  in  wholesale  quantities,  no  real  competition  in  prices 
was  to  be  expected. 

THE  POWDER  TRUST 

The  proceedings  against  the  powder  trust  were  brought  on 
July  30,  1907,  and  a  unanimous  decision  in  favor  of  the  govern- 
ment was  rendered  by  the  Circuit  Court  on  June  21,  1911.^  The 
trust  did  not  appeal  from  this  decision;  but  proceeded  at  once 
to  negotiate  with  the  Department  of  Justice  concerning  the 
details  of  the  plan  of  dissolution.  An  agreement  having  been 
reached,  a  final  decree  was  entered  on  June  13,  191 2.-  The 
decree  of  the  court  bore  a  striking  resemblance  to  the  decree  in 
the  tobacco  trust  case,  and  therefore  a  brief  description  will 
suffice.^ 

The  final  decree  dismissed  the  petition  as  to  sixteen  of  the 
defendants,  and  dissolved  the  monopoly  maintained  by  the 
remaining  twenty-seven  defendants  (twelve  corporate  and  fifteen 
individual).  Eight  of  the  corporate  defendants  were  ordered  to 
dissolve,  and  to  distribute  their  property  among  their  own  stock- 
holders; and  three  were  left  undisturbed,  so  far  as  their  corporate 
organization  was  concerned.  The  remaining  corporate  defendant 
was  the  E.  I.  du  Pont  de  Nemours  Powder  Company,  the  owner 
of  most  of  the  property  embraced  in  the  trust.  This  company 
was  permitted  to  retain  twenty-one  of  its  powder  plants,  but 
was  obliged  to  transfer  to  two  new  corporations — the  Hercules 
Powder  Company  and  the  Atlas  Powder  Company,  both  organ- 
ized for  this  purpose — its  remaining  plants,  twenty-two  in 
number.  In  general,  the  distribution  of  plants  under  the  decree 
was  such  as  to  make  the  restoration  of  competition  feasible. 

The  defendants  were  enjoined  from  continuing  the  illegal 
combination,  and  from  forming  by  any  device  whatsoever  any 
like  combination.     The  dissolution  plan  was  to  be  put  into 

'  188  Fed.  Rep.  127-156  (June  21,  1911). 

2  A  copy  of  the  decree  is  in  Decrees  and  Judgments  in  Federal  Anti-Trust 
Cases,  pp.  195  seq. 

^  On  the  dissolution  of  the  powder  trust,  see  Stevens,  Quarterly  Journal  of 
Economics,  27,  pp.  202-207. 


TRUST  DISSOLUTION  PROCEEDINGS  475 

operation  by  December  15,  191 2;  and  the  court  retained  jurist 
diction  of  the  case  for  the  purpose  of  making  such  further  orders 
as  might  prove  necessary. 

While  no  investigation  has  been  made  as  yet  into  the  results 
of  the  dissolution,  it  is  certain  that  to  date  they  have  been  slight 
Within  two  years  after  the  decree  of  the  Court  the  war  broke  out, 
and  down  to  the  close  of  191 8  the  demand  for  powder  was  so 
great  that  the  faciUties  of  powder  manufacturers  were  taxed 
to  the  utmost.  Prices  naturally  advanced;  and  probably  the 
amount  of  the  advance  was  entirely  unaffected  by  the  presence 
or  absence  of  competitive  conditions  in  the  industry.  For 
w^henever  the  demand  far  outstrips  the  supply,  a  competitive 
price  is  likely  to  be  the  same  as  a  monopoly  price,  unless  the 
monopoly  curtails  the  supply,  as  would  be  quite  improbable 
under  the  conditions  prevailing  during  1914-191S.  With  the 
termination  of  hostilities  in  November,  1918,  the  demand  for 
pow^der  declined,  and  prices  naturally  fell.  But  meanwliile  as 
the  result  of  the  war  the  general  price  level  for  commodities 
had  fundamentally,  and  perhaps  permanently,  changed.  Even 
a  governmental  body  with  large  powers  would  thus  have  dif- 
ficulty in  determining  the  effect  of  the  dissolution  on  the  price 
of  pow'der.  The  matter  is  complicated,  moreover,  by  the  fact 
that  the  tremendous  prosperity  of  powder  companies  during  the 
war  attracted  into  the  field  a  host  of  new  concerns,  whose  com- 
petition, if  effective,  might  conceivably  bring  the  price  of  pow^der 
temporarily  below  a  remunerative  level.  In  the  light  of  these 
facts,  it  appears  that  to  trace  %Aith  any  approach  to  accuracy 
the  effect  of  the  dissolution  on  prices  is  difficult,  if  not  im- 
possible. 

THE  SHOE  MACHINERY  TRUST 

Since  the  fall  of  191 1  at  least  four  separate  proceedings  have 
been  instituted  by  the  government  against  the  United  Shoe 
Machinery  Company  or  its  officers.  The  first  was  a  criminal 
suit  brought  on  September  19,  1911,  against  the  president  and 
other  officers  of  the  company,  charging  them  with  engaging 
in  a  combination  and  conspiracy  in  restraint  of  trade.    The  de- 


476       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

cision  of  the  Supreme  Court  dismissing  this  case  has  already  been 
described.^ 

The  second  was  a  civil  suit  instituted  on  December  12,  191 1, 
asking  for  the  dissolution  of  the  shoe  machinery  trust.  The 
District  Court  on  March  18,  1915,  and  the  Supreme  Court  on 
May  20,  1918,  decided  adversely  to  the  government.  The 
Supreme  Court,  as  elsewhere  noted,"  held  that  the  companies 
that  were  combined  in  the  United  Shoe  Machinery  Company 
in  1899  were  complementary,  and  not  competitive.  These 
companies  prior  to  1S99  had  individually  monopolized  various 
branches  of  the  shoe  machinery  business,  but  they  were  patent 
monopolies  protected  by  law,  and  hence  their  union  in  a  single 
company  was  not  illegal.  The  government  had  also  attacked 
the  leases  of  the  United  Company,  and  in  particular  the  so- 
called  tying  clauses.  But  the  Supreme  Court  held  that  the 
leases  were  simply  the  exercise  of  the  company's  right  as  a 
patentee. 

The  third  was  a  proceeding  to  enjoin  a  contract  alleged  to  be 
in  restraint  of  trade  in  "inseam  trimming  machines."^  The 
petition  of  the  government  was  filed  on  February  8,  1913.  The 
prosecution  of  the  case  was  not  pushed,  the  government  pre- 
ferring to  await  a  decision  in  the  dissolution  suit;  and  presum- 
ably with  the  loss  of  that  case  the  ancillary  proceeding  was 
dropped. 

The  fourth  was  an  attack  on  the  tying  clauses  in  the  shoe 
machinery  leases.  These  leases  had  been  upheld  by  the  Supreme 
Court  in  its  decision  of  May  20,  191S;  but  subsequent  to  the 
bringing  of  this  earlier  suit  the  Clayton  Act  was  passed,  and  the 
government  brought  a  new  proceeding,  on  October  18,  1915, 
charging  that  the  leases  violated  section  three  of  the  Clayton 
Act.  The  District  Court  rendered  a  decision  favorable  to  the 
government  on  March  31,  1020;  ■*  but  the  case  was  appealed  to 
the  Supreme  Court. 

*  See  p.  431  (U.  S.  V.  Winslow). 

^  See  p.  432  (U.  S.  V.  United  Shoe  Machinery  Company). 
^  Annual  Report  of  the  Attorney  General,  1913,  p.  14. 

*  264  Fed.  Rep.  138. 


TRUST  DISSOLUTION  PROCEEDINGS  477 

THE  CASH  REGISTER  TRUST 

A  civil  suit  against  the  National  Cash  Register  Company 

was  instituted  on  December  4,  1911.^  The  government  alleged 
a  conspiracy  to  restrain  and  monopolize  trade  in  cash  registers; 
and  asked  the  Court  to  enjoin  the  continuance  of  the  conspiracy 
and  attempted  monopoly,  and  also  to  enjoin  a  number  of  unfair 
competitive  methods.-  On  February  22,  191 2,  a  criminal  pro- 
ceeding was  begun  against  the  president  of  the  company  and 
twenty-nine  other  ofi&cials,  the  charges  being  substantially  the 
same  as  in  the  ci\dl  suit.^  As  the  prosecution  of  the  civil  case 
was  delayed,  pending  the  settlement  of  the  criminal  case,  the 
outcome  of  the  latter  may  be  briefly  noted.  A  demurrer  to  the 
indictment  having  been  overruled  by  the  district  court  on 
June  26,  1912,^  the  defendants,  with  only  one  exception,  were 
found  guilty,  and  jail  sentences  ranging  from  nine  months  to  one 
year  and  fines  aggregating  $135,000  were  imposed.^  An  appeal 
was  taken  to  the  Circuit  Court  of  Appeals,  where  the  conviction 
was  set  aside  on  March  13,  1915.*^  The  government  applied  to 
the  Supreme  Court  for  a  writ  of  certiorari,  which  was  denied  on 
June  14,  1915.^  Thereupon  the  government  concluded  not  to 
press  the  case  further. 

Despite  the  loss  of  the  criminal  suit  the  government  decided 
to  push  the  civil  suit  to  a  conclusion.  A  decision  in  the  case 
was  never  rendered,  however;  for  on  February  i,  1916,  the 
National  Cash  Register  Company  consented  to  the  entry  of  a 
decree. 

The  decree  granted  substantially  the  reUef  asked  by  the 
government  in  its  petition.^    It  did  not,  to  be  sure,  enjoin  the 

1  The  Federal  Antitrust  Laws,  July  i,  1916,  p.  70.  For  an  account  of  an 
earlier  suit  see  p.  441. 

2  Petition  in  United  States  v.  National  Cash  Register  Company,  pp.  31-38. 

3  The  Federal  Antitrust  Laws,  July  i,  1916,  pp.  73-74- 

*  201  Fed.  Rep.  697. 

5  Decrees  and  Judgments  in  Federal  Anti-Trust  Cases,  pp.  795-798. 
8  222  Fed.  Rep.  599. 
7  238  U.  S.  635. 

*  A  copy  of  the  decree  is  in  Decrees  and  Judgments  in  Federal  Anti-Trust 
Cases,  pp.  315-320. 


47S       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

company  against  further  attempting  to  monopolize  interstate 
commerce  in  cash  registers,  nor  did  it  prohibit  in  sweeping  fash- 
ion, as  requested  by  the  government,  the  suppression  of  compe- 
tition. But  it  did  find  that  the  company  had  combined  to 
restrain  and  monopoHze  trade,  and  it  enjoined  the  company 
and  its  directors,  officers,  agents,  and  employees  from  commit- 
ting a  number  of  acts.  A  summary  of  the  acts  enjoined  well 
shows  the  character  of  the  methods  whereby  the  company, 
aided  in  considerable  measure  by  the  possession  of  valuable 
patents,  had  been  able  to  secure  control  of  95  per  cent  of  the 
business  of  manufacturing  cash  registers.^ 

The  acts  specifically  prohibited  by  the  Court  were:  (i)  inducing 
purchasers  of  competing  cash  registers  to  repudiate  the  contract 
of  purchase;  (2)  espionage  upon  the  business  of  competitors; 
(3)  inducing  employees  or  agents  of  competitors  and  dealers  in 
competing  machines  to  sever  their  connection  with  the  compet- 
ing concerns;  (4)  manufacturing  or  selling  cash  registers  made  to 
resemble  competing  registers,  when  sold  for  the  dominant  pur- 
pose of  preventing  sales  of  competing  registers;  or  selling  cash 
registers  at  a  price  fixed  with  reference,  not  to  the  cost  of  manu- 
facture, but  to  the  price  of  competing  machines,  for  the  purpose 
of  eliminating  competitors  from  business;  (5)  selling  competing 
cash  registers,  whether  obtained  by  purchase,  exchange,  or  other- 
wise, for  the  purpose  of  preventing  sales  by  competitors;  (6)  dis- 
posing of  second-hand  registers  of  the  company's  make  with  the 
object  of  underselling  competitors  and  driving  them  from  the 
business,  provided  that  prices  made  in  good  faith  to  meet  com- 
petition were  not  prohibited;  (7)  employing  "competition  men," 
whose  principal  business  was  to  prevent  sales  of  competing  cash 
registers;  (8)  following  from  place  to  place  competitors,  their 
agents  and  dealers,  with  the  design  of  hampering  their  sales; 
(9)  circulating  reports  reflecting  upon  the  solvency  or  responsi- 
bility of  competitors  or  upon  the  efficiency  of  their  machines, 
when  such  reports  were  spread  as  a  means  of  preventing  the 

'  The  competitive  methods  of  the  company  are  described  at  considerable 
length  in  Petition  in  United  States  v.  National  Cash  Register  Company, 
December  4,  191 1,  pp.  12-29. 


TRUST  DISSOLUTION  PROCEEDINGS  479 

sales  of  competing  registers;  (10)  intimidating  competitors  or 
intending  competitors  by  displaying  placards  showing  the  sums 
lost  by  former  competitors,  or  intimidating  investors  or  prospec- 
tive investors  in  competing  enterprises;  (11)  threatening  pros- 
pective purchasers  of  competing  cash  registers  with  suit  for 
patent  infringement,  unless  such  claim  of  infringement  had  been 
sustained  by  a  court  of  competent  jurisdiction;  (12)  operating 
bogus  independents;  (13)  acquiring  ownership  or  control,  directly 
or  indirectly,  of  the  business,  patents,  or  plant  of  competitors; 
provided,  that  the  court  reserved  jurisdiction  to  permit  such 
acquisition,  if  it  concluded,  after  investigation  and  on  notice  to 
the  Attorney  General,  that  the  acquisition  would  supplement 
the  facilities  of  the  company,  and  would  not  substantially  lessen 
competition  in  the  industry. 

The  Court  retained  jurisdiction  of  the  cause  for  the  purpose  of 
enforcing  the  decree,  and  of  enabling  the  parties  thereto  to  secure 
a  modification  thereof  if  it  subsequently  appeared  that  its  pro- 
visions were  inadequate  to  maintain  competitive  conditions,  or 
were  unduly  oppressive  to  the  company  and  were  not  necessary 
to  maintain  such  competitive  conditions. 

The  decree,  it  will  be  observed,  did  not  require  the  dissolution 
of  the  trust.  This  is  to  be  explained,  no  doubt,  by  the  fact  that 
the  company  made  all  of  its  machines  at  its  plant  in  Dayton, 
Ohio;  and  there  were  therefore  obvious  difficulties  in  the  way  of  a 
physical  separation  of  parts  of  its  business.  It  would  have  been 
possible,  of  course,  to  have  segregated  the  various  makes,  yet  this 
could  hardly  have  been  done  without  seriously  interfering  with 
the  efficient  conduct  of  the  company's  affairs.  If  we  bear  in  mind 
the  oppressive  and  illegal  character  of  the  company's  acts 
through  a  period  of  some  twenty  years,  it  appears  that  the 
defendants  had  little  occasion  to  complain  of  the  treatment 
accorded  them. 

THE  HARVESTER  TRUST 

The  petition  to  dissolve  the  harvester  trust  was  filed  on 
April  30, 191 2.  This  action  had  been  preceded  by  several  months 
of  unsuccessful  negotiations   between   the   company  and  the 


48o      THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Department  of  Justice,  looking  toward  a  voluntary  readjustment 
of  the  company's  business.     Subsequent  to  the  bringing  of  this 
suit  the  company  reorganized  its  affairs;  and  turned  over  its 
foreign  business  and  the  new  lines  to  a  new  company,— the 
International  Harvester  Corporation.^     The  Department  of 
Justice  agreed  with  the  Bureau  of  Corporations  that  this  plan  of 
disintegration  did  not  suffice;  and  continued  its  suit.^    On  Au- 
gust 12,  1914,  the  Circuit  Court  rendered  its  decision,  declaring 
the  International  Harvester  Company  a  combination  in  restraint 
of  trade  amoag  the  states  and  with  foreign  nations.^    In  a  decree 
filed  on  August  15  it  ordered  that  the  monopoly  be  forever  dis- 
solved, and  that  the  business  and  assets  of  the  company  be 
divided  "among  at  least  three  substantially  equal,  separate, 
distinct,   and  independent  corporations,  with  wholly  separate 
owners  and  stockholders."  ^    On  October  3  the  court  agreed  to 
modify  the  decree  by  striking  out  the  words  "with  foreign 
nations"  wherever  they  appeared,  and  by  stipulating  merely 
that  the  business  and  assets  of  the  company  be  divided  "in  such 
manner  and  into  such  number  of  parts  of  separate  and  distinct 
ownership  as  may  be  necessary  to  restore  competitive  conditions 
and  bring  about  a  new  situation  in  harmony  with  law."  ^    The 
exact  meaning  of  the  decree  as  modified  is  not  clear,  but  it  is 
perhaps  arguable  that  common  stock  ownership  is  also  prohibited 
by  the  provision  for  dividing  the  business  into  "parts  of  separate 
and  distinct  ownership."    The  provision  that  the  corporations 
among  which  the  property  of  the  trust  was  to  be-divided  should 
have  "separate  owners  and  stockholders"  was  inserted  at  the 
request  of  the  government;  and  was  a  recognition  of  the  obvious 
fact  that  corporations  having  the  same  stockholders  could  hardly 
be  expected  to  compete  with  one  another.    However,  the  gov- 


1  See  p.  240. 

2  See  p.  240.    The  attitude  of  the  Attorney  General  is  shown  in  Brief  for 
the  International  Harvester  Company  (no.  757),  P-  i57- 

3  See  p.  435. 

^  Decrees  and  Judgments  in  Federal  Anti-Trust  Cases,  p.  338.     Italics 
supplied  by  the  author. 
^  Ibid.,  p.  340. 


TRUST  DISSOLUTION  PROCEEDINGS  '       481 

ernment  agreed  to  the  revised  form  of  decree  suggested  by 
counsel  for  the  trust.  ^ 

The  International  Harvester  Company  appealed  from  the 
decree  of  the  Circuit  Court  to  the  Supreme  Court.  The  case  was 
there  argued  in  April,  1915;  reargued  in  March,  1917;  and  in 
May,  191 7,  was  restored  to  the  docket  for  further  reargument. 
In  January,  19 18,  reargument  was  deferred  until  the  October 
term.  This  action  was  taken  upon  the  request  of  the  Attorney 
General,  who  stated  that  the  dissolution  of  numerous  trusts 
would  require  large  financial  operations,  which  should  be  avoided 
at  that  time  in  view  of  the  situation  created  by  the  war.^  Be- 
lieving that  a  decision  as  to  its  legal  status  might  be  long  de- 
layed, and  that  meanwhile  it  would  be  unable  because  of  the 
uncertainties  of  its  position  to  prepare  for  the  postwar  competi- 
tive struggle,  the  company  decided  to  withdraw  its  appeal, 
and  to  agree  to  a  consent  decree.  An  understanding  was  reached 
with  the  Department  of  Justice  on  July  11,  1918;  ^  and  in  Octo- 
ber, 1918,  the  Supreme  Court  dismissed  the  suit. 

The  agreement  between  the  government  and  the  company  pro- 
vided in  substance:^  (i)  That  the  company  would  endeavor  to 
sell  at  a  fair  price  to  a  responsible  and  independent  manufac- 
turer of  agricultural  implements  the  lines  of  harvesting  ma- 
chines then  marketed  by  it  under  the  trade  names  of  "Osborne," 
"Champion,"  and  "Milwaukee,"  including  their  trade  names 
and  all  equipment  especially  used  for  their  manufacture.  In  the 
inabiUty  of  the  parties  to  agree  on  what  constituted  a  fair  price, 
the  question  should  be  settled  by  the  District  Court.  (2)  That 
the  company  would  endeavor  to  sell  in  connection  with  said 
harvester  lines  the  Osborne  No.  i  plant  at  Auburn,  N.  Y.,  and 
the  Champion  harvester  plant  at  Springfield,  Ohio,  under  the 
same  conditions  as  to  price  as  enumerated  above.    (3)  That  the 

1  Decrees  and  Judgments  in  Federal  Anti-Trust  Cases,  p.  339. 

2  Annual  Report  of  the  Attorney  General,  1918,  p.  62. 

3  Report  of  the  Federal  Trade  Commission  on  the  Causes  of  High  Prices  of 
Farm  Implements,  p.  658. 

*  A  copy  of  the  final  decree,  dated  November  2,  1918,  is  in  Report  of  the 
Federal  Trade  Commission  on  the  Causes  of  High  Prices  of  Farm  Implc 
ments,  pp.  710-713. 


482        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

lines  and  plants  mentioned  above,  if  not  sold  within  one  yeai 
after  the  close  of  the  war,  should,  upon  request  of  the  govern- 
ment, be  disposed  of  at  public  auction  to  the  highest  bidder.^ 
(4)  That  the  company  should  be  prohibited,  after  December  31, 
1919,  from  having  more  than  one  representative  or  agent  in  any 
town  in  the  United  States  to  handle  the  sale  of  its  harvesting 
machines  and  other  agricultural  implements.  (5)  That  the 
object  to  be  attained  under  the  decree  was  to  restore  competitive 
conditions  in  harvesting  machines  and  other  agricultural  imple- 
ments; and  if  such  competitive  conditions  had  not  been  estab- 
lished within  eighteen  months  after  the  expiration  of  the  war,^ 
the  United  States  should  have  the  right  to  such  further  relief  as 
might  be  necessary. 

Shortly  after  the  agreement  with  the  Department  of  Justice 
had  been  reached,  the  directors  of  the  International  Harvester 
Company  (of  New  Jersey)  and  of  the  International  Harvester 
Corporation,  apparently  with  the  approval  of  the  Department, 
submitted  to  their  stockholders  a  proposal  for  a  merger  of  the 
two  companies.  The  statement  to  the  stockholders,  dated 
August  10,  191 8,  pointed  out  that  the  International  Harvester 
Company  (of  New  Jersey)  and  the  International  Harvester 
Corporation  had  at  no  time  been  competitors,  and  had  "main- 
tained close  and  mutually  beneficial  trade  relations."  The 
Company  manufactured  only  harvesting  machinery,  tillage 
implements,  binder  twine,  and  steel,  and  made  no  sales  outside  of 
the  United  States.  The  Corporation  made  the  new  lines  (trac- 
tors, gas  engines,  etc.)  in  this  country,  operated  the  foreign  plants 
formerly  owned  by  the  Company,  and  carried  on  the  entire 
foreign  trade  in  the  products  of  both  companies.  However,  the 
war  had  seriously  crippled  the  business  of  the  Corporation.  In 
some  countries  its  business  had  been  curtailed,  in  others,  notably 
Russia  and  the  Central  Empires,  practically  destroyed.     Its 

^  In  July,  19 18,  the  Osborne  line  of  harvesting  machines  was  sold  to  the 
Emerson-Brantingham  Company,  and  in  December,  19 18,  the  Champion 
line  was  sold  to  B.  F.  Avery  and  Sons,  of  Louisville,  Ky.    Ibid.,  pp.  660-661. 

2  Within  two  years  from  the  date  of  the  entry  of  the  decree  if  the  war 
should  end  within  less  than  six  months  after  the  entry  of  the  decree. 


TRUST  DISSOLUTION  PROCEEDINGS  483 

business  in  the  new  lines  was  excellent,  but  the  Corporation  was 
not  sufficiently  strong  financially  to  develop  these  lines,  or  to 
compete  actively  for  foreign  trade  upon  the  termination  of  the 
war.  Since  the  Corporation  distributed  abroad  the  products  of 
the  Company,  and  the  Company  distributed  in  the  United  States 
the  products  of  the  Corporation,  each  had  an  interest  in  the  pros- 
perity of  the  other.  Accordingly  their  reunion  was  recommended 
as  essential  to  the  efficient  operation  of  the  two  companies. 

The  proposed  merger  was  approved  by  the  stockholders  on 
September  10,  1918;  and  having  received  the  approval  of  the 
New  Jersey  Utilities  Commission  went  into  effect  on  Septem- 
ber 19,  the  name  of  the  new  company  being  the  International 
Harvester  Company. 

How  effective  will  the  dissolution  of  the  International  Har- 
vester Company  prove?  The  Federal  Trade  Commission  in  a 
recent  report  on  the  Causes  of  High  Prices  of  Farm  Implements 
declared  that  the  decree  of  the  Court  will  fail  in  its  purpose  to 
restore  competitive  conditions  in  the  harvesting  machine  busi- 
ness.^ It  based  this  conclusion  upon  the  small  and  constantly 
declining  output  of  the  "Osborne,"  "Champion,"  and  "Mil- 
waukee" brands,  as  compared  with  the  McCormick  and  Deering 
brands;  upon  the  low  factory  costs  of  the  McCormick  and  Deer- 
ing brands  as  compared  with  the  other  brands,  whether  those  to 
be  disposed  of  by  the  International  Harvester  Company  under 
the  decree  or  those  manufactured  by  independent  companies; 
and  upon  the  ownership  by  the  International  Harvester  Com- 
pany of  the  Wisconsin  Steel  Company.  It  therefore  recom- 
mended that  the  decree  be  modified  to  provide  (i)  that  the 
McCormick  plant  and  brands  and  the  Deering  plant  and  brands 
should  be  owned  by  two  separate  companies;  (2)  that  neither  of 
these  companies  should  be  allowed  to  control  the  Wisconsin  Steel 
Company;^  and  (3)  that  all  three  of  these  companies  should  have 
distinct  and  separate  stockholders. 

^  See  pp.  653-680. 

2  In  this  recommendation  the  Commission  appears  to  have  overstepped 
the  mark;  the  integration  of  industry,  which  it  proposed  to  forbid,  is  neither 
illegal  nor  opposed  to  sound  economic  policy, 


484       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

THE  GLUCOSE  TRUST 

The  decision  of  the  District  Court  dissolving  the  Corn  Prod- 
ucts Refining  Company  has  been  described  elsewhere.^  The 
decree  of  the  court,  entered  on  November  13,  1916,  ordered 
the  unlawful  combination  to  be  forever  dissolved.^  Following 
the  precedent  in  the  harvester  case,  the  business  of  the  company 
was  to  be  divided  "in  such  manner  and  into  such  parts  of  sepa- 
rate and  distinct  ownership"  as  might  be  necessary  to  restore 
competitive  conditions.  Finally,  injunctions  were  issued  against 
the  use  of  a  considerable  number  of  unfair  practices  enumerated 
in  the  decree.  The  company  appealed  from  the  decree  within  the 
four  months  allowed  to  it,  but  subsequently,  on  March  31,  1919, 
withdrew  its  appeal,  and  accepted  the  terms  proposed  by  the 
Department  of  Justice.  The  company  took  this  action  that  it 
might  be  relieved  of  uncertainty,  and  might  proceed,  undisturbed 
by  the  fear  of  government  prosecution,  to  make  such  improve- 
ments as  would  insure  the  future  of  its  business.^ 

The  settlement  with  the  Department  of  Justice  and  the  final 
decree  of  the  district  court — entered  March  21,  1919 — provided 
that  the  company  before  192 1  should  sell  its  reserve  plant  at 
Davenport,  Iowa,  which  had  not  been  in  operation  for  a  number 
of  years;  its  plant  at  Granite  City,  Illinois;  and  its  securities 
in  the  National  Starch  Company  and  the  Novelty  Candy  Com- 
pany ."^  It  further  provided  that  these  properties  or  securities 
should  not  be  sold  to  a  corporation  or  person  controlled  by  or 
affiliated  with  the  Refining  Company,  nor  to  any  defendant  in 
the  suit;  and  that  none  of  the  directors,  officers,  or  stockholders 
of  the  company  should  acquire  a  substantial  interest  in  the 
corporation  that  purchased  them.  Moreover,  the  Corn  Products 
Company  and  the  purchaser  might  not  have  any  directors  or 
officers  in  common.    If  at  the  end  of  three  years  these  measures 

*  See  p.  436. 

^  A  copy  of  the  decree  is  in  Judgments  and  Decrees  in  Federal  Anti-Trust 
Cases,  pp.  440-448. 

'  Letter  of  the  president  to  the  stockholders,  April  25,  1919.  Reprinted  in 
Chron.,  108,  p.  1723. 

*  Sec  Chron.,  108,  p.  1392. 


tRUST  DiSSOLUtiON  PROCEEDINGS  •    485 

proved  inadequate,  the  government  was  to  be  permitted  to  have 
further  rehef. 

The  result  of  the  decree  was  to  leave  the  Corn  Products 
Refining  Company  only  three  manufacturing  plants,  located  at 
Argo  and  Pekin,  Illinois,  and  Edgewater,  New  Jersey.  The 
output  of  the  Edgewater  plant  was  largely  marketed  abroad,  and 
the  company  had  strongly  protested  against  being  forced  to 
dispose  of  it.  Its  retention  by  the  company  leaves  it  in  a  posi- 
tion to  compete  effectively  for  the  export  trade. 

THE  MEAT  COMBINATION 

The  leading  meat-packers,  united  through  pools  or  agree- 
ments of  one  kind  or  another  during  the  past  thirty  years  or 
more,  have  been  attacked  in  numerous  proceedings.-^  In  1902 
the  government  filed  a  petition  in  equity  against  the  leading 
packers,  alleging  a  conspiracy  to  suppress  competition  and  to 
obtain  a  monopoly  in  commerce  in  meats.^  The  Circuit  Court 
granted  a  perpetual  injunction  in  1903,  which  was  affirmed  by 
the  Supreme  Court,  with  slight  modification,  in  January,  1905.^ 
The  government  maintained  that  the  defendants  continued  to 
conduct  their  business  in  the  manner  forbidden  by  the  injunction; 
and  in  July,  1905,  an  indictment  was  returned  against  practically 
the  same  defendants.  The  packers  claimed  that  they  were 
entitled  to  immunity  from  criminal  prosecution  because  they 
had  virtually  been  compelled  to  testify  against  themselves  in 
connection  with  the  investigation  of  the  Bureau  of  Corporations 
into  the  beef  industry;  and  they  were  sustained  in  this  conten- 
tion by  the  Court  in  a  decision  rendered  in  1906.^  This  decision, 
which  became  known  as  the  "immunity  bath"  decision,  led  to 

'  The  nature  of  these  pools  and  agreements,  and  the  position  of  the  leading 
packers  in  the  industry,  are  described  in  the  report  of  the  Federal  Trade 
Commission  on  the  Meat-Packing  Industry.  The  first  three  volumes  of  this 
report  are  summarized  by  the  author  in  the  American  Economic  Review,  9, 
pp.  8S0-885.  See  also  the  report  of  the  Bureau  of  Corporations  on  the  Beef 
Industry,  March  3,  1905. 

2Cf.  p.  403. 

'  122  Fed.  Rep.  529;  196  U.  S.  375. 

*  142  Fed.  Rep.  808. 


486       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

congressional  legislation  whereby  immunity  from  criminal  prose- 
cution was  limited  to  natural  persons  giving  testimony  or  evi- 
dence under  oath  in  obedience  to  a  subpoena. 

In  1910  four  new  proceedings  were  instituted.^  In  March 
two  suits — one  civil  and  the  other  criminal — were  brought 
against  the  National  Packing  Company,  a  concern  organized 
in  1903  to  hold  certain  independent  properties  that  had  been 
acquired  by  the  Swift,  Armour,  and  Morris  companies  in  the 
interests  of  a  merger  that  had  been  planned,  but  that  failed  to 
go  through.  The  directors  of  the  National  Packing  Company 
were  all  representatives  of  the  three  leading  packers,  and  the 
company  was  used,  it  was  alleged,  as  an  agency  for  the  harmoni- 
ous determination  of  general  policies  and  for  the  control  of  the 
trade.  In  April,  19 10,  a  criminal  action  was  brought  against 
the  Armour  Packing  Company;  and  in  September  one  against 
Louis  F.  Swift  and  others.  The  civil  suit  against  the  National 
Packing  Company  was  withdrawn  to  prevent  the  defendants 
from  asking  the  Court  for  a  postponement  of  the  criminal 
proceedings  until  the  settlement  of  the  civil  case;  and  all  of  the 
criminal  suits  were  lost  by  the  government.  In  191 2,  possibly 
to  avoid  a  new  civil  suit,  the  packers  dissolved  the  National 
Packing  Company,  and  distributed  its  assets  among  its  owners, 
that  is,  among  the  Swift,  Armour,  and  Morris  interests. 

Notwithstanding  the  claim  of  the  Department  of  Justice 
that  the  dissolution  of  the  National  Packing  Company  accom- 
plished a  substantial  restoration  of  competitive  conditions,^ 
the  outcome  of  this  large  number  of  suits  and  the  facts  brought 
to  light  in  later  investigations,  notably  those  of  the  Federal 
Trade  Commission,  made  it  clear  that  the  activity  of  the  govern- 
ment had  availed  comparatively  little. 

Much  bids  fair  to  be  accomplished,  however,  by  a  recent 
court  decree  materially  affecting  the  business  of  the  leading 
packers  known  as  the  Big  Five  (Swift  and  Company,  Armour 
and  Company,  Morris  and  Company,  Wilson  and  Company, 
and  Cudahy  Packing  Company).    Influenced  no  doubt  by  the 

^  The  Federal  Antitrust  Laws,  July  i,  1916,  pp.  62,  64. 
^  Annual  Report  of  the  Attorney  General,  191 2,  p.  16. 


TRUST  DISSOLUTION  PROCEEDINGS  487 

prospect  of  regulative  legislation  directed  particularly  at  the 
meat-packing  industry,  and  by  the  imminence  of  a  dissolution 
suit  under  the  Sherman  Act,  the  Big  Five  consented — so  the 
Attorney  General  announced  on  December  18,  igig — to  a  de- 
cree that  enjoined  the  practices  of  which  the  government  had 
particularly  complained.^ 

The  decree  of  the  Court  was  entered  on  February  27,  1920.^ 
Legal  verbiage  omitted,  it  provided  as  follows: 

(i)  The  corporate  defendants  were  perpetually  enjoined  from 
maintaining  in  any  manner  any  contract  or  combination  in 
restraint  of  interstate  commerce,  and  from  monopolizing  any 
part  of  such  commerce  (sec.  i). 

(2)  The  defendants  (individual  and  corporate)  were  per- 
petually enjoined  from  owning,  directly  or  indirectly,  any  capital 
stock  or  other  interest  in  any  public  stockyard  market  company 
in  the  United  States,  or  in  any  stockyard  terminal  railroad  in  the 
United  States,  or  in  any  stockyard  market  newspaper  or  journal 
published  in  the  United  States  (sec.  2).  The  defendants  within 
ninety  days  after  the  entry  of  the  decree  were  to  file  with  the 
Court,  for  its  approval,  their  plan  for  divesting  themselves  of  all 
ownership  or  interest  in  these  facilities,  whereupon  the  Court, 
if  it  approved  the  plan,  was  to  determine  the  date  by  which  it 
should  be  carried  out  (sec.  10).  The  purchasers  of  the  defend- 
ants' interests  in  stockyards  were  to  agree  with  such  of  the 
defendants  as  then  maintained  packing  plants  in  these  stock- 
yards that  for  a  period  of  ten  years  the  former  should  continue 
to  operate  the  stockyards  efficiently,  and  the  latter  should  con- 
tinue to  operate  the  packing  plants,  unless  strikes  or  other 
causes  beyond  their  control  should  prevent  (sec.  13). 

(3)  The  corporate  defendants  were  perpetually  enjoined  from 
using  their  distributive  system  and  facilities,  including  their 

*  These  practices  are  briefly  described  in  the  petition  for  the  United  States 
in  United  States  v.  Swift  and  Company  et  al.  (no.  37623);  and  in  detail  in  the 
report  of  the  Federal  Trade  Commission  on  the  Meat-Packing  Industry 
(see  particularly  the  summary  in  part  I,  pp.  28-78). 

2  A  copy  is  in  Decrees  and  Consents,  Petition,  Answers,  and  Stipulation  in 
United  States  v.  Swift  and  Company  (no.  37623),  a  pamphlet  published  by 
the  Department  of  Justice. 


488       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

branch  houses,  route  cars,  and  auto  trucks,  in  the  handling  of  a 
large  number  of  articles  enumerated  in  section  four,  except  in  so 
far  as  permitted  in  that  section,  and  except  refrigerator  cars 
when  in  good  faith  leased  to  common  carriers.  The  defendants 
might  dispose  of  any  part  of  their  distributive  system  with 
the  approval  of  the  Court  (sec.  3). 

(4)  The  corporate  defendants  were  perpetually  enjoined  from 
carrying  on  in  the  United  States,  directly  or  indirectly,  either 
for  domestic  trade  or  export  trade,  the  manufacturing,  jobbing, 
selling,  transporting  (except  as  common  carriers),  distributing, 
or  otherwise  dealing  in  a  large  number  of  commodities,  including, 
among  others,  fish,  vegetables,  fruits,  confectionery,  soft  drinks, 
preserves  of  all  kinds,  spices  and  relishes,  coffee,  tea,  chocolate, 
cocoa,  nuts,  flour,  sugar,  rice,  bread  and  crackers,  cereals,  grain, 
grape  juice,  and  miscellaneous  articles.  Provided,  however, 
that  these  commodities  might  be  dealt  in  by  the  defendants 
when  used  (a)  as  supplies  in  operating  their  packing  plants, 
branch  houses,  and  other  facilities;  (b)  in  the  construction  and 
physical  maintenance  of  their  packing  houses  and  other  facili- 
ties; (c)  in  the  operation  of  their  restaurants,  laundries,  or  other 
conveniences;  or  (d)  in  combination  with  meat  (sec.  4).  The 
requirements  of  this  section  were  to  be  met  at  as  early  a  date 
as  possible,  but  in  no  event  to  be  delayed  beyond  two  years 
from  the  entry  of  the,  decree.  The  approval  of  the  Court  to  the 
final  disposition  was  required,  and  the  Attorney  General  at 
any  time  within  the  two  year  period  might  apply  to  the  Court 
for  an  order  compelling  the  defendants  to  make  a  report  of 
progress  (sec.  12). 

(5)  The  individual  defendants  were  perpetually  enjoined 
from  owning,  either  directly  or  indirectly,  voting  stock  which 
in  the  aggregate  amounted  to  50  per  cent  or  more  of  the  voting 
stock  of  any  corporation  (except  common  carriers),  or  from 
holding  a  half  interest  or  more  in  any  firm,  which  was  carrying  on 
in  the  United  States  the  business  of  manufacturing,  jobbing, 
selling,  transporting,  or  distributing  a  large  number  of  com- 
modities, including  all  those  enumerated  in  the  preceding  sec- 
tion except  cereals,  grain,  grape  juice,  and  miscellaneous  articles 


TRUST  DISSOLUTION  PROCEEDINGS  •     489 

(sec.  5).  As  with  the  corporate  defendants  the  provisions  of 
this  section  were  to  be  fully  met  within  two  years  at  the  outside 
(sec.  12). 

(6)  The  defendants  were  perpetually  enjoined  from  o^\^ling 
or  operating  in  the  United  States,  either  directly  or  indirectly, 
any  retail  meat  markets,  except  those  located  at  their  plants 
and  maintained  primarily  for  the  accommodation  of  their  own 
employees  (sec.  6). 

(7)  The  defendants  were  perpetually  enjoined  from  owning, 
directly  or  indirectly,  any  capital  stock  or  other  interest  in 
public  cold-storage  warehouses  in  the  United  States,  subject  to 
certain  exceptions  (sec.  7).  Immediately  upon  the  entry  of  the 
decree  the  defendants  were  to  proceed  with  due  diligence  to 
divest  themselves  (to  the  extent  required  by  the  decree)  of 
their  retail  meat  markets  and  their  public  cold-storage  ware- 
houses, but  the  approval  of  the  Court  to  such  disposition  must 
be  had.  At  the  end  of  nine  months,  if  these  interests  had  not 
all  been  disposed  of,  the  Attorney  General  might  apply  to  the 
Court  for  an  order  specifying  the  date  by  which  the  transactions 
should  be  completed  (sec.  11). 

(8)  The  corporate  defendants  were  perpetually  enjoined  from 
engaging  in  the  United  States,  either  directly  or  indirectly,  in 
the  business  of  buying,  selling,  or  dealing  in  fresh  milk  and  cream, 
except  when  the  milk  or  cream  constituted  the  raw  materials 
for  certain  commodities  the  manufacture  of  which  was  permitted 
to  them,  and  except  when  their  sale  was  necessary  to  avoid  waste 
(sec.  8). 

(9)  The  corporate  defendants  were  perpetually  enjoined  from 
employing  any  illegal  trade  practices  (sec.  9). 

(10)  For  the  purpose  of  enabling  the  government  to  ascer- 
tain whether  the  defendants  were  carrying  out  the  terms  of  the 
decree  in  good  faith,  the  corporate  defendants  were  directed 
to  submit  their  books,  records,  correspondence,  and  other  docu- 
ments to  the  Attorney  General  upon  his  meeting  certain  re- 
quirements, such  as  written  notice  of  alleged  violations,  and  the 
Jike  (sec.  16). 

(11)  Jurisdiction  of  the  cause  was  retained  by  the  Court  for 


490       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

the  purpose  of  adding  such  further  rehef  as  might  become  neces« 
sary  for  the  enforcement  of  the  decree  (sec.  i8). 

From  this  brief  recital  of  the  terms  of  the  decree  it  is  evident 
that  the  dissolution  of  the  beef  combination — a  combination 
that  threatened,  according  to  the  Federal  Trade  Commission, 
to  control  within  a  few  years  the  wholesale  distribution  of  the 
nation's  food  supply — was  unusually  far-reaching  in  character. 
It  remains  to  be  seen  whether  its  effect  will  be  to  restore  com- 
petition among  the  packers  in  the  production  of  meat  and  allied 
products. 

THE  STEEL  TRUST 

A  petition  to  dissolve  the  steel  trust  was  filed  on  October  27, 
191 1.  The  District  Court  rendered  a  decision  in  favor  of  the 
Corporation  on  June  3,  191 5,  and  the  Supreme  Court  affirmed 
the  verdict  on  March  i,  1920.^  The  outcome  of  the  suit  against 
this  mammoth  organization  is  highly  significant  in  its  bearing 
on  the  effectiveness  of  dissolution  proceedings  as  a  means  of 
solving  the  trust  problem. 

CONSENT  DECREES 

The  foregoing  dissolution  proceedings  deal  with  trusts  that 
at  one  stage  or  another  have  contested  the  suits  brought  against 
them.  Yet  in  numerous  instances  the  government  has  been 
able  to  secure  relief  without  legal  contest;  the  companies  at- 
tacked by  the  government  have  been  unwilling  to  fight  the  case, 
and  have  consented  to  a  decree.  In  very  few  instances,  if  any, 
have  these  consent  decrees  involved  the  physical  division  of  the 
plants  or  assets  of  the  companies.  Instead  they  have  dealt 
rather  with  the  future  conduct  of  the  trust  or  combination. 

One  of  the  trusts  that  accepted  a  consent  decree  was  the 
Aluminum  Company  of  America.  The  government  instituted 
suit  against  this  company  on  May  16, 191 2.  It  charged^  that  the 
Aluminum  Company  of  America  had  been  protected  against 
competition  by  patents  down  to  1909,  and  that  thereafter  it  had 
endeavored  to  maintain  its  monopolistic  position  by  controlling, 

iCf.  p.  438. 

2  Petition  in  United  States  v.  Aluminum  Company  of  America,  pp.  1-43. 


TRUST  DISSOLUTION  PROCEEDINGS  491 

either  through  purchase  or  agreements,  the  essential  raw  mate- 
rials, and  by  employing  unfair  methods  of  competition  against 
its  would-be  rivals. 

The  basis  of  the  aluminum  industry  is  bauxite,  a  crude  ore 
found  in  extensive  natural  deposits.  The  bauxite  is  refined 
into  alumina,  from  which  the  metal  aluminum  is  made.  The 
Aluminum  Company  prior  to  the  date  of  the  government 
suit  made  large  purchases  of  bauxite  properties,  and  entered  into 
contracts  with  other  concerns,  whereby  they  agreed  not  to  use 
their  bauxite  deposits  in  the  manufacture  of  aliuninum,  nor  to 
sell  them  for  such  purpose  to  any  one  but  the  Aluminum  Com- 
pany of  America.  The  latter  entered  into  an  international 
pooling  arrangement  mth  the  Neuhausen  Company,  the  largest 
European  producer  of  aluminum,  whereunder  the  European 
company  agreed  not  to  sell  aluminum  in  the  United  States. 
Being  almost  the  sole  source  of  supply  of  aluminum  metal  the 
Aluminum  Company  was  in  a  position  to  monopolize  the  manu- 
facture of  aluminum  goods,  such  as  cooking  utensils,  castings, 
novelties,  etc.;  and  according  to  the  government  the  company 
through  the  use  of  unfair  competitive  tactics  was  rapidly  extend- 
ing its  control  in  these  branches.  The  unfair  acts  complained  of 
included  among  others:  refusal  to  supply  independent  manufac- 
turers with  the  necessary'  aluminum  metal,  often  without  warn- 
ing or  explanation;  purposeful  delaying  of  bills  of  lading  on 
material  shipped  to  competitors;  refusal  to  guarantee  quality, 
and  delivery  of  defective  metal;  and  charging  of  higher  prices  on 
aluminum  sold  to  competitors  than  to  companies  in  which 
the  Aluminum  Company  was  interested. 

The  decree  of  the  Court  granted  on  June  7,  191 2,  declared 
the  agreements  with  the  Neuhausen  Company  and  the  American 
companies  to  be  null  and  void,  and  perpetually  enjoined  the 
making  of  any  like  agreements.^  It  also  forbade  the  defendant 
and  its  officers  and  agents  ever  to  enter  into  any  combination  or 
agreement  the  purpose  or  effect  of  which  was  to  control  the  out- 
put or  the  prices  of  alimiinum  or  its  raw  materials,  and  to  enter 
into  any  contract  or  agreement  the  effect  of  which  was  to  restrain 
1  Decrees  and  Judgments  in  Federal  Anti-Trust  Cases,  p.  341. 


492       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

commerce  in  bauxite,  alumina,  or  aluminum,  or  to  hinder  anyone 
in  obtaining  a  supply  of  such  articles  in  the  open  market  in  free 
and  fair  competition.  It  further  perpetually  enjoined  the  em- 
ployment by  the  defendant  of  the  unfair  practices  referred  to 
above.  The  decree  being  agreed  to  by  the  Alunimum  Company 
of  America  on  the  assumption  that  it  had  a  substantial  monopoly 
of  the  output  and  sale  of  aluminum  in  this  country,  it  was  further 
provided  that  whenever  it  should  appear  to  the  Court  that  sub- 
stantial competition  in  the  production  and  sale  of  aluminum  in 
this  country  had  arisen,  the  Court  upon  petition  might  modify 
the  decree. 

Other  leading  companies — trusts  or  important  combinations — 
that  have  submitted  to  consent  decrees  are:  American  Coal 
Products  Company;  ^  American  Thread  Company; '  S.  F.  Bowser 
and  Company  (a  combination  in  piunps,  tanks,  and  outfits  used 
for  the  storage  and  handling  of  gasoline  and  other  inflammable 
liquids);^  Burroughs  Adding  Machine  Company;^  Central 
West  Publishing  Company  (with  the  Western  Newspaper  Union 
substantially  the  sole  manufacturer  of  ready-print  newspaper 
matter);^  General  Electric  Company;  ^  and  Otis  Elevator  Com- 
pany.^ Many  other  companies  have  consented  to  decrees,  but 
these  are  the  principal  ones.  In  no  instance  were  the  afore- 
mentioned companies  required  to  submit  to  a  physical  dissolu- 
tion; the  decree  merely  enjoined  certain  objectionable  practices, 
though  in  a  few  instances  it  ordered  the  dissolution  of  a  few 
subsidiary  companies  or  the  sale  of  some  securities. 

In  addition  a  number  of  associations  in  restraint  of  trade  have 
yielded  to  consent  decrees.  Among  them  are  the  Automobile 
Bumper  Association,  ^  the  New  Departure  IVIanufacturing 
Company  and  others  (manufacturers  of  bicycle  and  motor-cycle 
coaster  brakes  and  parts) ,^  the  News-Print  Manufacturers'  As- 
sociation,^°  and  the  Southern  Wholesale  Grocers'  Association.^' 

^  Decrees  and  Judgments  in  Federal  Anti-Trust  Cases,  pp.  461-467. 

2  Ibid.,  pp.  449-456.  ''Ibid.,  pp.  107-113. 

3  Ibid.,  pp.  587-592.  8  Ibid.,  pp.  645-648. 
*Ibid.,  pp.  457-459-                                   ^Ibid.,  pp.  471-475-  ' 
^Ibid.,  pp.  359-371.                                  loibid.,  pp.  637-640. 
«lbid.,  pp.  267-273.                                  "Ibid.,  pp.  247-251,  802-803. 


TRUST  DISSOLUTION  PROCEEDINGS  493 

Against  a  number  of  important  trusts  and  leading  combina- 
tions suits  are  now  ^  pending.  The  more  important  cases  are 
those  against  the  American  Can  Company,  the  American  Sugar 
Refining  Company,  the  Eastman  Kodak  Company,  and  the 
Keystone  Watch  Case  Company.  The  decision  of  the  lower 
court  has  been  rendered  in  all  of  these  cases,  except  in  that 
against  the  American  Sugar  Refining  Company.  The  verdict 
was  for  the  government  in  the  Kodak  case,  and  partly  for  it  and 
partly  against  it  in  the  Keystone  case.  In  the  Can  case  the  trust 
was  declared  to  have  been  organized  as  an  unla\\^ul  combination, 
but  the  only  relief  granted  was  the  retention  of  the  bill,  that  is, 
the  maintenance  of  court  supervision  o\er  the  company,  with 
power  granted  to  the  government  to  show  to  the  Court  at  any 
time,  if  it  could,  that  the  company  was  using  its  power  to  the  in- 
jury of  the  public,  or  that  the  domination  of  the  company  over 
the  industry  was  so  great  as  to  justify  dissolution.  Appeals  in 
these  cases  are  now  pending  in  the  Supreme  Court.  It  is  a  strik- 
ing illustration  of  the  law's  delays,  that  though  the  suit  against 
the  American  Sugar  Refining  Company  was  instituted  in 
November,  1910,  a  decision  by  the  lower  court  has  not  yet 
been  rendered.  The  case  was  ready  for  trial  in  October, 
191 5,  but  the  Court  ordered  the  hearing  postponed  pending 
the  decisions  of  the  Supreme  Court  in  the  harvester  and 
steel  suits. ^  The  former  has  now  been  withdrawn  from  the 
Court's  docket,  and  the  latter  after  being  postponed  from 
time  to  time  has  been  decided  in  favor  of  the  company.  A 
pa,rtial  explanation  of  the  delay  in  the  disposition  of  the 
steel  case  is  that  the  Attorney  General  on  January  2,  191 8, 
asked  the  Supreme  Court  to  defer  argument  on  this  and 
several  other  anti-trust  suits  until  the  fall  term  of  the  Court.^ 
Meanwhile  ten  years  have  elapsed  since  the  suit  against  the 
sugar  trust  was  first  brought. 

From  the  foregoing  record  it  is  clear  that  the  program  of 

*  November,   1920. 

2  Annual  Report  of  the  Attorney  General,  1916,  p.  28. 
^  Chron.,  106,  p.  32.    It  is  only  fair  to  the  United  States  Steel  Corporation 
to  say  that  this  suspension  was  opposed  by  it. 


494       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

trust  dissolution  has  by  no  means  been  fully  successful.      How 
is  this  comparative  lack  of  success  to  be  explained? 

One  of  the  principal  explanations  is  the  failure  to  prohibit  the 
companies  among  which  the  property  of  the  trust  was  divided 
from  having  substantially  the  same  stockholders.  The  first 
trusts  to  be  dissolved  were  the  oil  and  the  tobacco  trusts.  The 
Supreme  Court  had  found  these  trusts  clearly  illegal  under  any 
interpretation  of  the  Sherman  Act,  and  had  arraigned  them 
severely  because  of  their  competitive  tactics.  Nevertheless  the 
dissolution  decrees  in  these  two  cases  were  totally  inadequate  to 
restore  competitive  conditions.  Such  an  unfavorable  outcome, 
indeed,  was  all  that  could  have  been  expected  of  a  dissolution 
that  permitted  the  majority  stockholders  of  each  of  these  trusts 
to  exercise  control  over  the  separate  companies  into  which  each 
was  split.  This  was  the  view  taken  by  the  Federal  Trade  Com- 
mission, which  investigated  the  results  of  the  Standard  Oil  dis- 
solution. The  Commission,  though  it  refrained  from  criticising 
the  decree  itself,  partly  because  it  was  to  be  regarded  as  an  exper- 
iment, nevertheless  expressed  its  opinion,  after  mature  delibera- 
tion, that  the  experiment  of  dissolving  corporations  without 
separating  owners  had  not  achieved  the  desired  purpose,  which 
was  the  establishment  of  effective  competition.^  The  decree  in 
the  oil  case,  moreover,  was  notably  lacking  in  those  injunctive 
provisions  that  characterized  later  decrees  of  the  courts.  The 
decree  in  the  tobacco  case  was  more  complete,  both  in  the  details 
of  dissolution  and  in  the  restrictions  on  the  future  activities  of  the 
tobacco  companies,  but  as  pointed  out  before  at  much  length  it 
was  open  to  criticism  at  many  points.  As  in  the  oil  case,  the 
fourteen  tobacco  corporations  that  took  over  the  business  of  the 
trust  were  permitted  to  have  common  stockholders.  It  was  our 
experience  with  these  trusts  that  induced  President  Wilson  in  his 
message  on  trust  legislation  in  19 14  to  present  to  Congress  for  its 
consideration  the  advisability  of  requiring  individuals  owning 
stock  in  companies  which  ought  to  be  independent,  but  which 
because  of  common  stockownership  were  not,  to  choose  in  which 
one  of  them  they  would  elect  the  right  to  vote.    This  suggestion, 

iSee  p.  451. 


TRUST  DISSOLUTION  PROCEEDINGS  495 

which  went  to  the  heart  of  the  matter,  was  not  heeded  by  Con- 
gress, which  failed  to  act,  no  doubt,  on  the  ground  that  individ- 
uals were  privileged  to  hold  what  stocks  they  chose.  Within  a 
few  months  after  the  delivery  of  the  President's  message,  a  dis- 
trict court  provided  for  the  distribution  of  the  business  of  the 
International  Harvester  Company  among  at  least  three  sub- 
stantially equal,  separate,  distinct,  and  independent  corpora- 
tions, with  wholly  separate  owners  and  stockholders,  but  some  six 
weeks  later  with  the  consent  of  the  Attorney  General  this  provi- 
sion was  struck  out.^  A  similar  provision  is  found,  so  far  as 
we  have  been  able  to  discover,  in  only  two  other  court  decrees.^ 

Another  explanation  of  this  lack  of  success  is  the  ineffective 
manner  in  which  the  prosecutions  have  been  conducted,  partic- 
ularly during  the  early  life  of  the  law.  The  first  trust  cases  were 
lost  because  of  faulty  presentation  "  or  because  of  the  failure 
of  the  Attorney  General  to  press  them  to  a  conclusion.^  A 
number  of  others  were  not  brought  until  long  after  the  organiza- 
tion of  the  several  trusts,  for  the  reason  that  the  officials  charged 
with  the  enforcement  of  the  Sherman  Act  had  no  sympathy  with 
its  purposes.  Moreover,  the  frequent  changes  in  administration 
— the  period  of  ser\ice  of  an  attorney  general  has  averaged  about 
two  years — ^have  led  to  varying  policies,  and  have  therefore  not 
promoted  the  effective  handling  of  trust  cases. 

A  third  explanation  is  the  failure  to  recognize  sufficiently  that 
dissolution  is  not  only  a  legal  problem,  but  an  economic  one  as 
well.  This  was  conceded  by  the  Attorney  General  in  connec- 
tion with  the  tobacco  trust  case.  Yet  in  this  very  case  the  lower 
court  waved  aside  certain  objections  that  bore  on  the  "eco- 
nomics" of  the  tobacco  business,  saying,  "no  doubt  the  novel 
problem  presented  to  this  court  is  connected  with  questions 
of    economics    as    well    as    with    questions     of    law.     But 

^  See  p.  480. 

2  The  glucose  (see  p.  484)  and  the  Eastman  Kodak  (see  Decrees  and 
Judgments  in  Federal  Anti-Trust  Cases,  p.  478).  An  appeal  is  pending  in 
the  latter  case. 

3Cf.  pp.  441,  442. 

^  Cf.  p.  442. 


496       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

this  is  a  court  of  law,  not  a  commerce  commission,  and 
the  legal  side  of  the  proposition  would  seem  to  be  the  con- 
trolling one."  ^  In  order  that  expert  knowledge  as  to  economic 
matters  might  be  available  for  the  courts.  Congress  provided 
in  1914  that  the  Federal  Trade  Commission,  at  the  request  of 
any  court,  should  frame  an  appropriate  form  of  decree  in  any 
suit  in  equity  brought  by  the  Attorney  General  under  the  anti- 
trust acts.  Doubtless  Congress  intended  that  the  courts  should 
avail  themselves  of  this  privilege,  but  they  have  rarely  done  so, 
and  on  one  occasion  they  actually  denied  a  request  of  the  defend- 
ant that  the  plan  of  dissolution  be  framed  by  the  Commission. 

A  fourth  explanation  is  the  failure  of  the  courts  and  juries 
to  impose  penalties  proportionate  to  the  offense  committed. 
The  government  has  brought  both  criminal  and  civil  actions. 
In  the  former,  prison  sentences  have  rarely  been  imposed,  and 
fines  have  been  very  light,  often  much  less  than  the  illegal  prof- 
its realized.  The  law  not  being  fully  clarified,  juries  have  hesi- 
tated to  convict  when  the  penalty  was  to  be  imprisonment.  No 
doubt  this  was  proper  during  the  early  stages  of  the  enforce- 
ment of  the  law;  if  the  government  was  unable  to  define  the 
offense  with  precision,  or  was  not  able  to  advise  the  parties  as 
to  just  what  was  legal  and  what  was  not,  the  justice  of  sending 
to  jail  those  who  crossed  an  undefinable  line  was  doubtful.  Look- 
ing into  the  future,  however,  as  the  anti-trust  laws  receive  fuller 
interpretation  at  the  hands  of  the  courts,  so  that  business  men 
are  in  a  better  position  to  know  definitely  what  is  legal  and  what 
is  illegal,  it  may  perhaps  be  anticipated  that  less  leniency  will 
be  shown  law  breakers.  The  adoption  of  a  code  of  business  ethics 
through  the  activities  of  the  Federal  Trade  Commission  under 
its  powers  to  prevent  unfair  methods  of  competition  should  also 
operate  towards  the  same  end.  It  may  be,  therefore,  that  the 
penal  laws  will  become  more  effective  in  the  future  than  they 
have  been  in  the  past. 

In  the  civil  cases  the  government  has  been  more  successful. 
Approximately  one  hundred  suits  in  equity  of  varying  degrees 
of  importance  have  been  brought  under  the  Sherman  Act,  and 

*  See  p.  467. 


TRUST  DISSOLUTION  PROCEEDINGS  497 

the  government  has  won  a  considerable  proportion  of  them. 
In  a  number  of  instances,  as  related  above,  the  offending  cor- 
porations have  not  even  contested  the  case,  but  simultaneously 
with  the  filing  of  the  suit  have  consented  to  a  court  decree  grant- 
ing the  reUef  demanded  by  the  government.  The  successful 
outcome  of  these  suits  has  been  due  to  the  fact  that  the  pro- 
ceedings were  remedial,  rather  than  punitive,  penalties  apply- 
ing only  when  the  decree  of  the  court  was  disobeyed.  It  is  thus 
the  equity  feature  of  the  Sherman  Act  that  has  given  it  a  large 
part  of  such  effectiveness  as  it  has  had  in  the  past.  However, 
a  statute  that  does  not  include  within  its  prohibitions  a  com- 
bination of  the  size  and  power  of  the  United  States  Steel  Cor- 
poration must  be  conceded  to  be  of  limited  effectiveness. 

It  would  be  a  mistake,  however,  to  judge  of  the  success  of  the 
Sherman  Act  solely  by  the  readjustments  that  have  been  brought 
about  through  judicial  proceedings.  The  mere  existence  of  the 
act  and  the  possibility  of  prosecution  under  it  have  reduced  the 
necessity  for  its  exercise,  just  as  the  conferring  on  the  Federal 
Trade  Commission  of  the  power  to  prevent  unfair  methods  of 
competition  has  given  it  less  occasion  to  use  that  power.  It  is 
worthy  of  note  that  practically  no  new  trusts  have  been  formed 
since  the  government  energetically  began  to  avail  itself  of  the 
provisions  of  the  anti-trust  acts,  and  that  many  of  those  already 
organized  have  been  less  active  in  maintaining  their  position  by 
unfair  means.  Some  of  our  modern  trusts,  notably  the  harves- 
ter, can,  sugar,  and  steel  trusts,  have  so  revised  their  practices 
that  their  competitors  find  little  cause  to  complain  of  their  con- 
duct. Doubtless  the  managers  of  the  modern  day  trusts  believe 
that  it  pays  to  cultivate  the  good  will  of  the  public,  but  is  this 
not  in  large  measure  because  of  the  fact  that  the  public  (through 
its  constituted  authority)  has  readily  at  hand  the  tools  with 
which  to  proceed  against  these  trusts,  once  its  hostility  is  fully 
aroused?  We  have  but  to  call  to  mind  the  threat  of  govern- 
mental control  of  the  meat-packing  industry,  iand  the  decision  of 
the  packers  to  submit  to  a  consent  decree  by  way  of  bending 
to  the  storm.  And  if  the  courts  retain  jurisdiction  of  trust  cases 
after  a  decree  has  been  entered,  as  they  did  in  the  powder,  cash 


498      THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

register,  harvester,  glucose,  meat,  lamp,  and  can  cases,  for  the 
purpose  of  modifying  the  decree  if  the  provisions  thereof  prove 
inadequate,  there  is  greater  cause  to  anticipate  success  in  the 
restoration  of  competition.  The  significance  of  this  recent  ten- 
dency becomes  clearer  when  it  is  recalled  that  in  the  tobacco 
case  the  Attorney  General  had  asked  the  Court  to  reserve  to 
the  government  the  privilege  of  applying  for  further  relief,  if 
during  the  following  five  years  it  appeared  that  the  dissolution 
plan  had  not  brought  about  a  situation  in  harmony  with  the 
law;  and  that  the  Court  held  (in  191 1)  that  it  had  no  such  power. 
Now  it  appears  that  the  Courts  do  have  such  power,  and  are 
ready  to  exercise  it  if  necessary  to  carry  out  the  purpose  of  the 
statute. 


CHAPTER  XIX 

THE  ANTICIPATED  ECONOMIES  OF  THE  TRUST 
FORM  OF  ORGANIZATION— TO  WHAT  EXTENT 
REALIZED  1 

There  seems  little  reason  to  doubt  that  the  modern  trust 
movement  originated  largely  in  the  desire  of  the  manufacturers 
to  restrict  or  suppress  competition,  and  thus  to  secure  monopoly 
profits.  Nevertheless  the  prospect  of  securing  the  economies 
that  the  trust  form  of  organization  apparently  promised  also 
played  a  considerable  part.  It  is  the  purpose  of  this  chapter  to 
consider  in  some  detail  whether  these  economies,  as  reahzed  in 
practice,  are  of  sufficient  importance  from  the  standpoint  of 
public  welfare  to  justify  trusts,  it  being  assumed  that  through 
government  regulation  it  will  be  possible  to  control  these  huge 
organizations  in  so  far  as  this  seems  necessary  or  desirable.  In 
other  words,  is  the  policy  of  trust  dissolution  ill-advised,  as 
occasioning  the  destruction  of  an  organization  superior  in 
efficiency  to  the  one  it  was  intended  to  replace? 

In  this  discussion  it  is  important  that  the  reader  keep  clearly 
in  mind  the  meaning  of  the  word  trust  as  it  was  defined  in  the 
beginning  of  the  book."  The  trust,  tersely  stated,  is  a  horizon- 
tal combination  possessing  monopolistic  power.  The  economies 
of  the  trust  form  of  organization  must  at  all  times  be  clearly 
distinguished,  first,  from  the  economies  of  large-scale  produc- 
tion, and  second,  from  the  economies  that  may  be  realized  by  a 
combination  not  possessing  monopolistic  power.  The  trust,  it 
would  seem,  should  receive  legal  sanction  only  if  it  is  able  with- 

1  See  Bullock,  Quarterly  Journal  of  Economics,  15,  pp.  167-217;  Durand, 
The  Trust  Problem,  ch.  4;  Jenks  and  Clark,  The  Trust  Problem,  ch.  3; 
Montague,  Trusts  of  To-Day,  ch.  2;  Ely,  Monopolies  and  Trusts,  ch.  4; 
and  Industrial  Commission,  vols,  i  and  13. 

^  See  p.  I. 

499 


500       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

out  injury  to  the  public  welfare  to  reduce  the  costs  of  produc- 
tion or  of  selling  in  ways  that  are  not  open  to  large  individual 
plants,  and  in  ways,  moreover,  that  are  not  open  to  a  combin- 
ation of  large  (or  small)  plants  that  has  no  monopohstic  power. 
In  some  branches  of  industry,  it  is  to  be  observed,  it  may  be 
possible  to  unite  fifty  or  more  plants  without  achieving  a  dom- 
inant position  in  the  industry.  Obviously,  therefore,  the  econ- 
omies that  may  fairly  be  ascribed  to  the  trust  are  solely  those 
additional  economies  that  a  large-sized  combination  not  hold- 
ing a  preponderant  position  in  the  industry  is  unable  to  secure. 

The  economies  of  the  trust  form  of  organization  may  be  an- 
alyzed under  three  heads: 

I.  Economies  in  Bargaining. 

II.  Economies  in  Production. 

III.  Economies  in  SelHng. 

I.  Economies  in  Bargaining 

The  economies  in  bargaining  may  be  treated  under  the  fol- 
lowing headings:  (i)  purchase  of  materials  and  supplies;  (2) 
distributors;  (3)  labor;  (4)  financial  institutions;  (5)  railroads. 

(i)  Purchase  of  materials  and  supplies.  Large  concerns,  of 
course,  can  often  buy  their  raw  materials  and  supplies  more 
cheaply  than  small  concerns,  but  can  a  trust  buy  its  materials 
more  cheaply  than  a  large-sized  combination?  Viewed  in  one 
light  the  trust  can  more  or  less  permanently  secure  its  raw  ma- 
terials more  cheaply  than  would  be  possible  under  a  state  of  com- 
petition. The  monopoly  profits  of  the  trust  arise  largely  from 
a  restriction  of  the  output,^  and  this  necessarily  involves  a  re- 
duction of  the  demand  for  the  raw  materials  consumed  by  it. 
If  the  raw  materials  required  by  the  trust  are  used  in  many  other 
industries,  as  is  the  case  with  the  tin  plate  trust,  for  example, 
the  reduction  in  the  price  of  the  raw  materials  may  be  slight; 
if  they  are  used  in  practically  no  other  industry,  as  is  the  case 

with  the  tobacco  trust,  the  reduction  may  be  considerable.    The 

I 
1  If  the  trust  is  actually  more  efficient  than  other  business  units,  it  caU) 
of  course  secure  monopoly  profits  without  restricting  the  output,  by  merely 
appropriating  the  savings  effected  by  it. 


ECONOMIES  OF  THE  TRUST  501 

tendency  toward  a  reduction  in  the  price  of  the  materials  and 
supplies  is  accentuated  if  the  industry  is  one  of  increasing  costs, 
and  attenuated  if  it  is  one  of  decreasing  costs.  However,  the 
attainment  in  this  way  of  a  lower  price  level  for  materials  con- 
fers no  advantage  upon  the  trust  as  compared  with  its  com- 
petitors; and  is  hardly  to  be  cited  as  an  argument  for  the  trust 
form  of  organization,  since  the  result  is  a  diminution  in  the 
wealth  of  the  country,  both  in  terms  of  raw  materials  and  of 
finished  products. 

Without  reducing  its  own  output  the  trust  may  nevertheless 
succeed  in  depressing  the  market  for  materials  and  supplies, 
providing,  of  course,  it  is  not  confronted  with  a  trust  in  these 
lines.  If  the  sellers  of  leaf  tobacco,  for  example,  had  reason  to 
believe  that  there  would  be  a  market  for  their  total  output, 
they  would  normally  be  inclined  to  withhold  their  product 
until  they  had  secured  the  price  determined  by  the  equilibrium 
of  demand  and  supply.  But  since  the  demand  is  uncertain — 
it  depends,  of  course,  largely  on  the  amount  the  trust  decides 
to  buy — they  may  be  tempted,  particularly  since  many  of  them 
can  not  afford  to  hold  their  crop  indefinitely,  to  take  a  lower 
price  in  order  to  make  sure  of  a  sale.^  If  the  lower  market  price 
thus  registered  is  open  to  the  competitors  of  the  trust,  they  gain 
equally  with  it;  yet  in  either  event  this  economy  in  the  purchase 
of  raw  material  represents  no  social  benefit,  since  the  producers 
lose  what  the  trust  gains.  This  practice  persistently  employed 
will  therefore  tend  to  discourage  the  production  of  the  articles 
used  by  the  trust,  and  thus  to  diminish  national  wealth. 

There  is  one  direction  in  which  trusts  may  perhaps  gain.  If 
they  can  eliminate  unnecessary  middlemen,  that  is,  promote  a 
more  direct  and  economical  distribution  of  raw  materials  and 
supplies  from  the  producer  to  themselves  (the  trusts),  they  will 
reduce  costs,  and  in  addition  will  be  performing  a  real  public 
service.  And  yet  the  trust  may  not  have  any  particular  ad- 
vantage in  this  respect  over  the  large  combination;  for  the 
advantages  of  wholesale  buying  do  not  increase  indefinitely. 

1  If  their  product  is  perishable,  the  position  of  the  sellers  is  even  more  un- 
fortunate. 


S02        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

The  president  of  the  American  Tobacco  Company,  while  claim- 
ing some  advantage  in  the  purchase  of  labels  and  similar  articles, 
admitted  that  the  trust  could  not  buy  the  principal  raw  mate- 
rials—leaf tobacco,  sugar,  and  licorice — any  cheaper  than  its 
competitors;  in  fact,  it  was  at  somewhat  of  a  disadvantage, 
since  it  could  not  pick  up  bargains  in  the  same  way  that  a  smaller 
buyer  could.  ^  Testimony  to  the  same  effect  was  given  by  the 
promoter  of  the  rubber  trust;  by  a  leading  official  in  the  Stand- 
ard Rope  and  Twdne  Company  (a  successor  of  the  cordage 
trust) ;  and  by  the  president  of  the  silver- ware  trust.-  A  com- 
petitor of  the  whisky  trust  asserted  that  he  could  buy  one  car 
of  corn  just  as  cheaply  as  the  trust  could  buy  100,000  bushels 
(say  80  cars) ;  ^  and  counsel  for  the  Corn  Products  Refining  Com- 
pany (the  glucose  trust)  admitted  that  his  company  had  no 
advantage  in  the  purchase  of  corn.*  The  president  of  the  United 
States  Steel  Corporation  testified  that  the  constituent  companies 
of  the  trust  each  purchased  their  supplies  separately,^  thus  show- 
ing that  the  formation  of  a  trust  did  not  permit  any  saving  in 
this  regard.  The  conclusion  would  appear  to  be  justified  that 
while  trusts  may  have  decided  advantages  in  buying  as  compared 
with  small  concerns,  they  have  no  striking  advantages,  if  any, 
over  large  companies,  except  indeed  such  advantages  as  repre- 
sent no  social  benefit. 

The  trust,  to  be  sure,  can  often  effect  a  saving  by  integrating 
its  business  in  such  a  way  that  it  assures  itself  an  ample  supply 
of  raw  materials  at  cost;  and  it  is  the  more  likely  to  find  this 
advantageous,  if  it  must  buy  its  raw  materials  from  another 
trust  further  down  in  the  productive  process.  Yet  integration 
is  not  limited  to  the  trust  form  of  organization;  it  is  open  to  any 
concern  with  ample  financial  resources  and  operating  on  a  large 
enough  scale  to  justify  the  undertaking.  The  Bethlehem  Steel 
Corporation,  for  example,  is  as  fully  integrated  as  the  United 

1  Industrial  Commission,  XIII,  pp.  326-327. 

2  Ibid.,  p.  36;  I,  pp.  163,  1050. 

3  Ibid.,  I,  p.  184. 

■»  Brief  for  tlie  Corn  Products  Refining  Company  (no.  10-122),  p.  31. 
^  Industrial  Commission,  XIII,  p.  453. 


ECONOMIES  OF  THE  TRUST  '       503 

States  Steel  Corporation.  If  integration  is  incomplete,  so  that 
the  trust  must  still  rely  on  other  concerns  for  a  portion  of  its 
materials,  the  production  of  a  part  of  its  supply  may  improve 
its  strategic  position,  and  may  result  in  an  economy  in  bar- 
gaining; if,  on  the  other  hand,  integration  is  complete,  the  ab- 
sorption by  the  trust  of  the  profit  at  all  stages  of  the  productive 
process  represents  an  economy  in  production.  Yet  in  either 
event,  whether  the  economy  be  one  of  bargaining  or  of  produc- 
tion, the  gain  accrues,  not  as  the  result  of  the  organization  of  a 
trust,  but  as  a  result  of  the  integration  of  industry, — a  practice 
that  may  be  availed  of  by  any  concern,  whether  trust  or  not, 
which  produces  on  a  sufficiently  large  scale  and  which  is  able  to 
command  the  requisite  capital. 

(2)  Distributors.  The  trust  is  unquestionably  in  a  position 
to  bargain  more  effectively  with  the  distributors  of  its  products. 
The  trust,  controlling  the  greater  part  of  the  supply  of  a  par- 
ticular commodity,  naturally  possesses  a  strategic  position  in 
negotiations  with  the  distributors,  whether  they  be  jobbers, 
wholesalers,  or  even  retailers.  The  evidence  indicates  that  the 
tobacco  trust,  for  example,  was  able  to  encroach  steadily  on  the 
jobbers'  margins  during  the  period  from  1901  to  1910.^  To  the 
extent  that  the  competitive  system  had  evolved  a  distributing 
organization  that  was  wasteful,  there  would  be  an  obvious  gain 
in  the  reduction  of  the  number  of  distributors.  However,  the 
available  infoniiation  does  not  indicate  that  the  formation  of 
trusts  has  been  accompanied  by  far-reaching  changes  in  the 
distributive  machinery.  The  wall  paper  trust  endeavored  to 
economize  by  eliminating  the  middleman,  but  after  three  years 
gave  up  the  experiment.^  There  are  lines  of  business,  to  be  sure, 
in  which  the  middlemen  have  been  eliminated  in  the  seUing 
end,  yet  these  are  not  solely  or  characteristically  those  businesses 
that  are  dominated  by  trusts. 

1  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  III,  pp.  71,  80,  171,  190. 

2  Industrial  Commission,  XIII,  p.  284.  The  cotton  yarn  trust  endeavored 
to  dispense  with  the  ser\'ices  of  the  commission  merchants  who  were  accus- 
tomed to  handle  the  sales  of  cotton  yarn  on  a  commission  basis;  but  lost  more 


504        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES  " 

The  trust,  it  must  be  admitted,  sometimes  took  advantage  of 
the  power  over  the  distributors  that  its  control  of  the  trade  gave 
it.  As  Mr.  Montague  says,  "in  some  manner  or  other,  every 
trust  seeks  to  dominate  the  wholesale  trade."  ^  The  most  com- 
mon practice  was  a  requirement  that  the  wholesaler  (and  perhaps 
retailer  also)  handle  only  the  goods  produced  by  the  trust,  this 
requirement  being  reenforced  ordinarily  by  a  rebate  for  the 
faithful  observance  of  the  restriction.  These  factors'  agree- 
ments were  employed  by  many  trusts,  including  the  tobacco, 
rubber,  sugar,  whisky,  wall  paper,  tin  plate,  photographic  cam- 
era, and  plate  glass  trusts.  Such  devices,  of  course,  are  not  justi- 
fied from  an  economic  point  of  view;  and  they  are  now  illegal. 

(3)  Labor.  The  trust  may  be  said  to  have  an  advantage  in 
its  dealings  with  labor.  Thus,  during  1899  the  American  Smelt- 
ing and  Refining  Company,  confronted  with  a  strike  at  its 
Colorado  plant,  suspended  operations  there,  but  continued 
to  produce  at  its  other  plants.^  The  trust  sustained  a  compar- 
atively small  loss  through  the  idleness  of  the  smelter,  whereas 
the  workmen  sustained  a  heavy  loss;  and  as  a  result  the  strike 
was  a  failure.  Within  limits,  of  course,  this  method  of  handling 
labor  difficulties  may  be  employed  by  a  combination,  as  well  as 
by  a  trust.  Yet  whether  employed  by  combination  or  trust, 
its  effectiveness  depends  on  the  lack  of  organization  among  the 
workers.  If  the  organization  of  trusts  reduced  the  bargaining 
power  of  labor,  as  it  undoubtedly  did,  it  demonstrated  to  the 
workers  that  they  must  make  their  organizations  fully  as  broad 
in  scope  as  the  agencies  with  which  they  had  to  bargain.  The 
gain  of  the  trusts  on  this  score  may  therefore  prove  to  be  tempo- 
rary, particularly  should  the  workingman  come  to  realize  more 
and  more  the  advantage  to  his  group  of  effective  organization 
and  unity  of  action. 

by  the  change  than  it  gained.  See  Dewing,  Corporate  Promotions  and 
Reorganizations,  p.  322. 

•  Trusts  of  To-Day,  p.  44. 

2  The  sugar  trust  had  similar  success  in  1910  with  a  strike  at  its  Brooklyn 
refinery.  See  Hearings  ou  the  American  Sugar  Refining  Company,  191 1- 
1912,  p.  2994. 


ECONOMIES  OF  THE  TRUST  505 

(4)  Financial  institutions.  The  trust,  by  virtue  of  the  monop- 
oly strength  of  the  organization  and  the  financial  standing  of 
its  directors,  can  possibly  borrow  from  the  banks  at  lower  rates  of 
interest  than  can  other  concerns.  This  may  be  true,  though,  if  it 
be  true,  it  is  a  serious  indictment  of  our  banking  system;  and  the 
advantage  thus  gained  may  be  deemed  to  be  a  temporary  as  well 
as  a  nonsocial  one.  The  probability,  however,  is  that  it  is  not 
true  under  normal  conditions;  the  large  concern  with  a  stable 
and  solvent  business  and  high  grade  management,  not  to  men- 
tion a  combination  of  this  character,  can  ordinarily  borrow  as 
cheaply  as  the  more  powerful  trust.  Under  certain  circum- 
stances, to  be  sure,  banks  controlled  by  individual  trusts  or  their 
stockholders  may  deny  much  needed  credit  to  a  competitor  for 
the  purpose  of  throtthng  it.  This  practice  was  presumably  re- 
sorted to  by  the  United  Shoe  Machinery  Corporation  to  prevent 
a  competing  Hne  of  shoe  machinery'  being  estabhshed.^  Yet 
obviously  the  successful  employment  of  such  practices  does  not 
establish  the  ability  of  a  trust  to  borrow  more  cheaply  than  a 
combination  could  in  the  absence  of  such  an  obstructive  trust. 

A  trust  can  sell  its  securities  to  the  public  (through  investment 
houses  perhaps)  at  better  prices  because  of  the  wide  distribu- 
tion of  its  business,  yet  the  saving  that  it  can  realize  in  this 
regard  as  compared  \\ith  an  important  combination  is  sHght, 
and  would  not  appreciably  affect  the  total  cost  of  doing  business. 
Many  concerns  do  not  appeal  to  the  pubhc  for  funds,  but  finance 
themselves  out  of  surplus  earnings. 

(5)  Railroads.  Trusts,  it  may  plausibly  be  asserted,  are  in  a 
position  to  negotiate  effectively  with  railroads  and  other  trans- 
portation agencies,  and  by  reason  of  the  large  traffic  that  they 
control  to  secure  concessions  in  rates  and  facilities.  Unfortu- 
nately in  the  past  this  has  been  altogether  too  true;  the  oil  trust 
stands  out  as  a  shining  example  of  the  iniquities  of  railroad  dis- 

1  See  testimony  of  Mr.  (now  Justice)  Louis  D.  Brandeis  in  Report  of  the 
Senate  Committee  on  Interstate  Commerce  on  Control  of  Corporations, 
1913,  pp.  1 188-1190.  Even  more  improper  was  the  device  employed  by  the 
American  Sugar  Refining  Company  to  prevent  a  newly  constructed  inde- 
pendent refinery  from  being  operated.    See  p.  loi. 


5o6        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

crimination.  Such  practices,  however,  offend  the  rules  of  fail 
play,  and  stand  condemned  at  the  bar  of  public  opinion.  Theii 
importance  has  diminished,  and  will  doubtless  continue  to 
diminish. 

II.   Economies  in  Production 

The  economies  in  production  fall  in  the  following  groups: 
(i)  continuous  operation  of  plants;  (2)  specialization  of  plants 
and  machinery;  (3)  specialization  of  ability;  (4)  employinent  in 
each  plant  of  the  best  devices,  including  patents;  (5)  competi- 
tion between  plants;  (6)  utilization  of  by-products;  (7)  insur- 
ance; (8)  smaller  fixed  charges  per  unit  of  product. 

(i)  Continuous  operation  of  plants.  Under  competitive 
conditions  the  producing  capacity  of  the  country  frequently 
exceeds  the  demand  at  prices  remunerative  to  producers,  and  as 
a  result  there  is  some  idle  equipment.^  The  trust  can  correct 
this  situation,  it  is  thought,  by  closing  the  inefficient  and  poorly 
located  plants,  and  by  operating  the  better  ones  at  capacity.  It 
is  obvious  that  the  trust  may  take  such  action,  though  it  is 
equally  clear  that  the  result  is  often  a  diminution  in  the  output. 
It  is  difficult  to  determine  the  amount  of  the  saving  that  the  trust 
can  effect  in  this  way,  but  it  is  probable  that  it  is  less  than  is 
claimed.  The  increase  in  plant  capacity  in  manufactures  or- 
dinarily comes  through  the  provision  of  a  number  of  new  plants 
(or  additions  to  old  ones),  no  one  of  which  produces  more  than 
a  small  percentage  of  the  total  output.  There  are,  to  be  sure, 
a  few  industries  in  which  a  single  factory  will  produce  a  large 
proportion  of  the  country's  output,  yet  this  is  the  exception 
rather  than  the  rule.  Why,  it  may  be  asked,  are  so  many  new 
plants  built,  if  the  result  is  an  excess  capacity?  There  are  two 
obvious  explanations. 

First,  the  construction  of  new  factories  may  be  in  anticipation 
of  an  increase  in  demand  which  will  shortly  cause  the  surplus 
capacity  to  disappear  and  permit  the  properties  to  realize  a  satis- 
factory profit.    In  the  United  States,  where  most  industries  show 

'  This  sometimes  results  from  governmental  tinkering.  See  Bullock, 
Quarterly  Journal  of  Economics,  15,  pp.  194-195,  208-210. 


ECONOMIES  OF  THE  TRUST  '         507 

a  more  or  less  steady  growth,  this  outcome  is  regularly  to  be  ex- 
pected, though  the  probability  of  continued  growth  leads  to  the 
provision  of  still  further  plant  facilities  which  sooner  or  later  run 
ahead  of  the  demand.  Our  rapid  growth  is  thus  in  considerable 
measure  responsible  for  the  imperfections  of  our  competitive 
system.  However,  even  the  trust  must  possess  some  surplus 
producing  capacity  at  all  times  except  those  of  maximum  de- 
mand, if  it  is  to  be  in  a  position  to  supply  the  increased  demand 
when  it  comes.  This  is  particularly  true  in  those  branches  of 
industry  in  which  the  adjustment  of  supply  to  demand  is  most 
imperfect,  since  it  is  in  these  branches — iron  and  steel,  for  ex- 
ample— that  the  length  of  time  required  to  construct  new  plants 
is  ordinarily  greatest. 

Second,  the  price  may  be  sufHciently  high,  despite  the  exces- 
sive facilities,  to  attract  those  entrepreneurs  of  unusual  ability 
who,  by  virtue  of  low  costs,  can  make  a  profit  when  the  extra- 
marginal  producers  are  unable  to  do  so.  If  the  prospective  de- 
mand does  materialize,  the  market  may  temporarily  absorb  the 
total  supply,  including  that  of  the  relatively  inefficient  pro- 
ducers. Yet  the  time  will  come  sooner  or  later  when  it  will  fail 
to  do  this;  and  then  there  must  be  a  reckoning.  Under  com- 
petitive conditions  the  reckoning  will  normally  take  the  form  of 
the  elimination  of  the  high  cost  concerns.  By  this  process  then 
the  surplus  producing  capacity  tends  to  disappear,  though  so 
long  as  industry  continues  to  be  characterized  by  alternations 
of  prosperity  and  depression  it  will  not  permanently  disappear. 

In  what  way  can  the  trust  improve  on  this  operation  of  compet- 
itive forces?  First,  the  trust  by  buying  up  the  inefficient  plants 
can  close  them  more  promptly  than  would  otherwise  occur. 
Yet  this  is  subject  to  the  danger  that  it  will  shut  up  so  many 
plants  that  there  will  eventuate  an  undue  limitation  of  the 
supply  (in  order  that  monopoly  prices  may  be  realized);  and 
this  would  mean  that  the  public  would  be  obliged  permanently 
to  pay  for  the  monopolized  commodity  a  price  sufficiently  high 
to  cover  a  return  on  the  investment  in  inefficient  and  not  to  be 
utilized  plants.^  It  is  probable,  therefore,  that  the  public  inter- 
1  Assuming  that  the  trust  retains  its  monopoUstic  power. 


5o8       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

est  would  be  better  served  by  a  combination  uniting  a  limited 
number  of  the  most  efficient  plants  than  it  would  be  by  a  trust, 
which  must  acquire  the  inefficient  plants  as  well  as  the  efficient 
if  it  is  to  succeed  in  its  monopolistic  purpose.  Second,  the  trust 
through  its  control  of  the  supply  may  conceivably  so  adjust  the 
output  to  the  varying  demand  that  an  excessive  producing 
capacity  will  not  again  emerge.  This  is  conceivable,  but  hardly 
probable.  Despite  the  establishment  of  trusts  on  a  large  scale 
some  twenty  or  more  years  ago  there  continue  to  be  pronounced 
oscillations  of  business.  The  United  States  Steel  Corporation, 
our  largest  industrial  concern,  organized  in  an  industry  notable 
for  its  fluctuations,  has  endeavored  to  justify  itself  by  introduc- 
ing a  new  order  in  this  respect,  yet  without  conspicuous  success. 
Unquestionably  it  has  somewhat  reduced  the  irregularity  of 
business,  yet  at  the  present  writing  ^  it  is  able  to  produce  about 
twice  as  much  steel  as  it  is  in  fact  producing.  The  truth  would 
appear  to  be  that  it  is  impossible,  unless  indeed  under  a  socialis- 
tic state,  satisfactorily  and  at  all  times  to  synchronize  the  supply 
and  demand;  and  it  would  manifestly  be  difficult,  if  not  impos- 
sible, even  under  a  socialist  state  because  of  the  impossibility  of 
controUing  the  weather,  the  discovery  of  minerals,  and  the 
whims  of  a  fickle  public. 

Conceding  that  alternations  of  boom  and  depression  are  in- 
evitable in  the  system  of  private  property  it  may  be  held  that 
there  is  still  an  advantage  for  the  trust,  in  that  in  periods  of 
depression  it  can  operate  a  part  of  its  plants  at  capacity  with 
a  consequent  reduction  in  their  costs,  and  can  close  the  other 
plants  entirely.  Thus,  the  American  Sugar  Refining  Company 
adopted  the  practice  of  running  most  of  its  refineries  at  capacity 
at  all  times,  and  of  adjusting  the  supply  of  its  product  to  the 
demand  by  changes  in  the  output  of  the  Brooklyn  refinery,  its 
largest  and  best  equipped  factory.  In  this  way  the  trust  confined 
the  higher  cost  that  results  from  operation  at  partial  capacity 
to  one  ])lant,  producing  a  comparatively  small  percentage  of  its 
total  output,  whereas  its  competitors  sustained  this  higher  cost 
on  their  total  investment,  provided  none  of  them  had  more  than 

*  May,  1919. 


ECONOMIES  OF  THE  TRUST  509 

one  refinery.  Mr.  Havemeyer,  formerly  the  head  of  the  sugar 
trust,  was  of  the  opinion  that  in  this  direction  his  company  ef- 
fected its  greatest  saving.  However,  with  respect  to  this  econ- 
omy the  following  observations  may  be  made:  (i)  this  arrange- 
ment may  be  adopted  by  a  combination  as  well  as  by  a  trust, 
though  no  doubt  the  former  would  not  be  able  to  run  as  large 
a  percentage  of  its  plants  at  capacity;  (2)  it  represents  a  gain 
only  during  those  periods  when  some  idleness  is  enforced  by  a 
diminished  demand;  (3)  it  is  not  possible  in  every  industry,  for 
in  some  industries  all  of  the  factories  are  perforce  idle  during  a 
part  of  the  year;  ^  (4)  it  is  not  feasible  when  the  trust  has  special- 
ized its  plants;  (5)  in  some  instances  it  may  be  more  economical 
to  operate  at  partial  capacity  than  to  pay  the  freight  rate  from 
the  factory  that  is  used  as  a  buffer, — notably  true  when  the 
plants  have  been  located  with  the  design  of  reducing  cross 
freights,  and  when  the  freight  rate  constitutes  an  important 
item  in  the  cost. 

(2)  Specialization  of  plants  and  machinery.  The  trust  can 
specialize  its  plants,  and  thus  secure  the  higher  degree  of  effi- 
ciency that  ordinarily  results  from  specialization.  The  stock 
illustration  of  this  saving  is  the  American  Steel  Hoop  Company, 
a  manufacturer  of  iron  and  steel  hoops,  bands,  bars,  and  cotton 
ties,  all  of  which  are  rolled  on  high  speed  rolls.  Prior  to  the 
organization  of  the  trust  each  plant  manufactured  a  great  vari- 
ety of  shapes  and  sizes,  and  consequently  had  to  keep  on  hand  a 
great  variety  of  rolls.  Much  time  was  necessarily  lost  in  chang- 
ing the  rolls  to  meet  the  demand  for  the  various  sizes.  With  the 
organization  of  the  trust  it  became  possible  for  each  mill  to 
specialize  more  or  less  on  particular  shapes  and  sizes,  and  thus 
to  eliminate  much  of  the  waste  effort. 

While  it  is  true  that  there  is  the  possibility  of  economy  in  this 
direction,  its  importance  should  not  be  exaggerated.  Thus  one 
writer  states  that  the  steel  hoop  trust  as  the  result  of  special- 
izing its  plants  effected  a  saving  in  manufacture  estimated  at 
$1.00  to  $1.50  per  ton  as  compared  with  the  competitive  system, 

'  Beet  sugar  factories  are  idle  about  two-thirds  of  the  year.  See  Report  of 
the  Federal  Trade  Commission  on  the  Beet  Sugar  Industry,  p.  2. 


5IO       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

or  the  system  of  small  independent  mills.  This  comparison, 
however,  is  hardly  fair;  for  obviously  in  estimating  the  sav- 
ings effected  by  the  trust,  comparison  should  not  be  made  with 
small  mills,  but  with  mills  of  the  size  of  those  that  were  combined 
in  the  trust.  The  mere  fact  of  having  joined  the  trust  did  not, 
of  course,  by  a  stroke  of  magic  increase  the  size  of  the  separate 
mills. 

Moveover,  the  economy  of  the  trust  form  of  organization  is 
to  be  appraised,  not  by  its  efficiency  as  compared  with  individual 
plants  alone,  but  by  comparison  with  a  combination  of  plants 
not  possessing  monopoly  power.  Clearly  some  of  the  saving 
that  results  from  specialization  can  be  secured  by  a  combina- 
tion, though  it  may  well  be  that  only  a  trust  can  realize  this  sav- 
ing in  full. 

The  economies  of  specialization  are  not  open,  however,  to 
all  trusts  in  the  same  degree,  and  to  some  not  at  all.  Thus  when- 
ever a  trust  makes  largely  a  single  product  with  comparatively 
few  grades,  little,  if  any,  economy  through  specialization  is 
possible.  In  this  respect  the  sugar  and  salt  trusts,  for  example, 
stand  in  marked  contrast  to  the  steel  and  tobacco  trusts. 

(3)  Specialization  of  ability.  The  trust,  because  it  is  such 
a  huge  organization,  permits  the  fullest  specialization  of  busi- 
ness-ability. The  president  of  the  American  Tobacco  Company 
found  the  chief  advantage  of  the  tobacco  trust  in  "the  combi- 
nation of  talent,"  by  which  he  referred  no  doubt  to  the  union  of 
the  officials  of  the  separate  companies  in  a  common  enterprise 
and  their  distribution  in  that  enterprise  to  the  position  for  which 
they  were  best  suited.  That  the  trust  combines  most  of  the 
talent  of  the  industry  is  obvious,  yet  it  is  not  so  clear  that  it 
possesses  any  marked  advantage  in  the  effective  distribution  of 
its  talent  over  a  combination  or  even  a  large  individual  concern. 
However,  it  unquestionably  does  offer  a  greater  opportunity  to 
those  gifted  individuals  who  have  the  recjuisite  executive  and  or- 
ganizing ability  to  manage  a  trust. 

(4)  Employment  in  each  plant  of  the  best  devices,  including 
patents.  When  a  group  of  independent  establishinents  are 
combined  in  a  trust,  the  most  effective  labor-saving  and  other 


ECONOMIES  OF  THE  TRUST  511 

devices  that  have  been  developed  in  any  one  plant  may  without 
restriction  be  employed  in  them  all.  This  is  an  undoubted  gain. 
Since  the  separate  plants  reflect  and  embody  the  ingenuity  of 
officials  forced  to  adopt  improvements  if  they  are  to  succeed  in 
the  competitive  struggle,  it  may  be  assumed  that  some  are  more 
efficient  in  one  regard  and  some  in  another.  With  the  plants 
brought  under  a  common  management  there  takes  place  an 
interchange  of  ideas  and  the  adoption  in  each  plant  of  the  most 
beneficial  features  of  each.  Of  course,  this  is  possible  also  to  a 
combination,  though  not  to  the  same  degree.  The  question 
would  remain  whether  once  the  trust  was  well  estabhshed 
there  would  continue  the  same  eagerness  to  eliminate  wasteful 
methods  and  to  introduce  improved  ones. 

The  same  gain  is  open  to  the  trust  with  respect  to  those  de- 
vices that  are  covered  by  patents.  Under  competition  one 
company  might  have  a  patent  on  one  branch  of  the  productive 
process,  and  other  companies  might  have  patents  on  other 
branches.  Unless  the  patented  device  is  available  to  everyone  on 
a  royalty  basis,  as  is  ordinarily  not  the  case,  no  one  company  is 
able  to  make  the  most  advantageous  use  of  the  results  of  inven- 
tion. Through  the  common  ownership  of  patents  the  trust 
effects  a.  clear  saving,  though,  to  be  sure,  the  saving  is  a  tem- 
porary one,  in  view  of  the  limited  life  of  a  patent.  It  does  not 
follow,  however,  that  this  is  an  argument  for  the  trust;  it  may 
merely  prove  the  desirability  of  effecting  certain  modifications 
in  our  patent  system.  It  would  be  entirely  possible  to  permit  the 
fullest  use  of  all  patents  by  anyone,  reimbursing  the  inventor  by 
means  of  royalties  or  by  means  of  governmental  purchase.^  In 
this  way  the  common  use  of  patents  would  be  made  possible,  and 
competition  for  the  product  of  the  inventor  would  be  main- 
tained. 

Conceding  that  the  trust  effects  a  saving  through  a  combina- 
tion of  patents,  there  still  remains  a  very  practical  consideration 

>  The  Chemical  Foundation,  whose  stock  is  held  by  American  manufac- 
turers of  chemicals  and  dyestuffs,  leases  all  the  German  chemical  patents 
that  were  taken  over  by  the  Alien  Property  Custodian  to  any  manufacturer 
who  makes  application,  and  who  pays  the  royalty  charge. 


512        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

bearing  on  the  comparative  efficiency  of  the  trust  as  a  permanent 
factor  in  our  economic  life.  This  is  the  question  whether  the 
trust  is  likely  to  promote  invention.^  Because  of  its  financial 
strength,  the  trust,  of  course,  can  employ  a  staff  of  inventors, 
chemists,  and  other  technical  experts  to  invent  new  devices  and 
to  develop  improved  methods.  Yet  so  can  any  large  company 
or  combination  possessing  adequate  financial  resources.  Thus, 
Mr.  Steward,  of  the  International  Harvester  Company,  testified 
that  each  of  the  companies  that  went  into  the  trust  had  had  a 
force  of  inventors  and  experimenters;  and  that  Mr.  Deering  was 
"noted  for  expending  large  sums  of  money  for  experimenta- 
tion." ^  Much  evidence  along  this  line  might  be  presented,  yet  it 
is  hardly  necessary,  since  it  is  clear  that  this  expenditure  is  one 
that  depends  on  large-scale  operations  and  financial  strength 
rather  than  on  combination. 

Yet  though  trusts  endeavor  to  promote  invention  and  experi- 
mentation there  is  some  reason  to  believe  that  they  are  less  suc- 
cessful in  this  regard  than  their  predecessors.  In  the  first  place, 
when  monopoly  exists  the  inventor  has  less  inducement  to  exercise 
his  inventive  ability.  His  market  is  a  more  limited  one,  since  in 
the  main  he  must  sell  to  the  trust;  and  his  rewards  are  therefore 
likely  to  be  less.  Under  certain  circumstances  he  may  produce 
the  patented  article  in  competition  with  the  trust,  yet  usually 
this  is  not  feasible,  since  most  inventions  are  simply  improve- 
ments at  some  stage  of  a  productive  process  already  well  covered 
by  patents.  Secondly,  there  is  some  tendency  under  trust 
control  for  experimentation  to  proceed  along  more  narrow  lines.^ 

"•  For  a  further  discussion  of  this  point  see  p.  5,35. 

2  Brief  for  the  United  States  in  International  Harvester  Company  v. 
United  States  (no.  757),  p.  130. 

*  A  group  of  prominent  manufacturers,  who  were  instrumental  in  organiz- 
ing the  Shoe  Manufacturers'  Alliance,  representing  about  40  per  cent  of  the 
shoe  production  of  the  country,  declared  in  191 2  that  whereas  nearly  every 
year  from  1 870-1900  had  witnessed  some  marked  advance  in  shoe  machinery, 
with  rich  rewards  for  inventors,  such  new  inventions  as  had  been  made 
during  the  period  since  1900  (the  trust  was  organized  in  1899)  were  rela- 
tively unimportant.  This  check  on  the  development  of  invention  they 
attributed  to  the  organization  of  a  trust,  which  removed  the  stimulus  of 


ECONOMIES  OF  THE  TRUST  513 

Were  the  trust,  through  its  corps  of  inventors,  to  discover  some 
improved  method  of  production  that  involved  the  scrapping  of 
its  old  machinery  or  even  its  old  plant  it  might  well  hesitate, 
were  competition  absent,  to  introduce  the  improvement,  since 
the  trust  would  have  to  bear  the  loss  involved  in  abandoning  the 
old  machinery  or  plant.  Under  a  competitive  regime  with 
patents  open  to  all  upon  the  payment  of  royalty  an  established 
concern  would  have  to  keep  up  with  industrial  progress,  or  give 
way  to  some  other  concern,  possibly  a  newly  established  enter- 
prise. But  a  trust,  having  a  monopoly  of  its  invention  for  seven- 
teen years,  is  under  no  such  compulsion.  Mr.  Knauth  has 
recently  called  attention  to  the  social  loss  that  is  involved  in  this 
wide  destruction  of  capital  under  competitive  conditions,  and 
has  implied  that  society  would  be  justified  in  discouraging  the 
adoption  of  a  new  invention,  unless  the  resulting  saving  is 
sufficiently  great  to  compensate  for  the  destruction  of  existing 
capital  that  is  rendered  antiquated  by  the  new  process.^  There 
is  truth  in  this  contention,  yet  the  interests  of  society  in  the  long 
run  would  appear  to  be  best  promoted  by  giving  free  opportunity 
to  inventive  genius,  no  matter  whose  ox  is  gored.  As  Mr.  Knauth 
himself  points  out,  one  invention  frequently  leads  to  another; 
and  there  is  thus  an  obvious  danger  in  retarding  the  introduction 
of  one  improvement  because  of  the  social  loss  of  capital,  when 
the  new  invention  may  in  turn  lead  to  others  that  will  more  than 
compensate  for  all  past  obsolescence. 

(5)  Competition  between  plants.  The  trust  by  uniting,  a 
number  of  plants  engaged  in  the  manufacture  of  the  same 
article  or  articles  is  in  a  position  by  means  of  a  comparison  of 
costs  and  other  records  to  stiumlate  a  wholesome  rivalry  among 
plants  and  departments.  If  at  any  factory  a  given  item  of  cost 
is  abnormally  high,  the  trust  managers  can  require  an  explana- 
tion thereof,  and  unless  it  is  due  to  some  ineradicable  cause  can 
bring  about  an  improvement  in  this  regard.  The  result  is  a 
tendency  toward  a  general  leveling  up  of  efficiency.    Professor 

competition.  Report  of  the  Senate  Committee  on  Control  of  Corporations, 
1913,  pp.  2266-2267. 

1  Political  Science  Quarterly,  30,  p.  580, 


514        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Jenks  holds  that  the  competition  that  arises  in  this  way  is  more 
far-reaching  than  under  a  competitive  regime,  since  the  exact 
cost  and  efficiency  at  the  separate  plants  are  known,  and  the 
pressure  to  make  a  good  showing  is  great.  ^  The  argument  has 
weight,  yet  it  is  a  question  whether  a  salaried  manager,  even  with 
a  stake  in  the  profits,  would  strive  as  earnestly-  to  make  a  good 
showing  as  an  independent  business  man  for  whom  inefficiency 
means  not  only  the  failure  to  secure  large  profits,  but  the  actual 
sustaining  of  losses.  Be  that  as  it  may,  the  gain  that  accrues 
from  competition  among  plants  is  open  to  the  combination  as  well 
as  the  trust,  though  doubtless  to  a  lesser  extent.  However,  no 
gain  on  this  score  is  possible,  even  to  the  trust,  when  the  practice 
has  been  followed  of  specializing  each  plant  on  the  production  of 
a  given  shape  or  size.  Obviously  if  each  plant  is  devoted  to  the 
manufacture  of  a  single  machine  or  size  to  secure  to  the  fullest 
extent  the  economies  of  large-scale  production,  no  basis  exists 
for  a  close  comparative  study  of  the  separate  plants.  This  point 
illustrates  what  many  writers  have  apparently  not  seen,  namely, 
that  to  enumerate  a  list  of  trust  economies  and  to  illustrate  each 
by  some  one  trust  leaves  the  reader  with  the  mistaken  impression 
that  each  economy  may  be  realized  by  all  trusts.  The  fact  is,  as 
will  be  pointed  out  in  discussing  other  economies,  that  the  resort 
to  one  saving  often  precludes  the  employment  of  another;  and 
that  a  number  of  economies  may  be  availed  of  only  by  a  compar- 
atively few  trusts. 

(6)  Utilization  of  by-products.  Trusts  can  effect  as  complete 
a  utilization  of  by-products  as  is  feasible.  Yet  this  saving  results 
from  production  on  a  large  scale  rather  than  from  combination. 
That  this  is  the  case  is  indicated  in  the  fact  that  many  writers 
fail  to  mention  the  utilization  of  by-products  in  enumerating  the 
advantages  of  trusts.  Those  writers  who  do  mention  it  com- 
monly cite  the  meat-packing  plants,  and  refer  to  the  conspicuous 
absence  of  waste  in  these  establishments.  The  fact  is,  however, 
that  such  combination  as  exists  in  this  business  is  of  the  nature 
of  a  pool  rather  than  of  a  trust.     The  leading  companies  have 

1  Jenks,  Trusts  and  Industrial  Combinations,  Bulletin  of  the  Department 
of  Labor,  vol.  V,  no.  29,  p.  675. 


ECONOMIES  OF  THE  TRUST  515 

undoubtedly  largely  eliminated  competition,  yet  they  have  done 
so  through  agreement  rather  than  through  combination;  and  it  is 
by  virtue  of  the  large  scale  of  their  individual  operations  rather 
than  by  virtue  of  their  agreement  that  they  realize  these  econo- 
mies. Moreover,  in  some  industries  there  are  no  by-products, 
and  therefore  there  is  no  need  of  a  trust  to  insure  their  effective 
utilization.  Thus,  in  the  manufacture  of  many  steel  and  to- 
bacco products  there  are  no  by-products;  and  in  the  refining 
of  cane  sugar  there  are  only  two  of  importance  (molasses  and 
sirup).  ^ 

(7)  Insurance.  Trusts  can  save  in  insurance,  particularly 
fire  insurance,  because  of  the  wide  distribution  of  their  plants. 
This  possibility  exists  in  some  instances,  yet  not  in  all.  Thus, 
the  cash  register  trust  with  only  one  factory  has  no  such  dis- 
tribution; and  other  concerns,  the  sugar  trust,  for  example, 
have  only  a  few  plants,  and  therefore  find  it  necessary  to  con- 
tinue their  insurance.  Some  combinations,  such  as  the  American 
Agricultural  Chemical  Company,  have  a  wider  distribution  of 
plants,  and  thus  of  risks,  than  many  trusts.  It  is  quite  obvious 
that  the  saving  in  insurance,  when  it  exists,  has  not  been  of 
sufficient  consequence  to  exert  any  considerable  influence  on 
the  trust  movement. 

(8)  Smaller  fixed  charges  per  unit  of  product.  The  trust  with 
its  large  output  has  an  advantage  because  its  fixed  charges 
are  distributed  over  more  units,  and  thus  the  expense  per  unit 
is  less.  This,  however,  is  really  an  argument  for  large-scale 
production,  and  not  for  the  trust.  In  every  industry  that  has  a 
national  market,  plants  of  a  certain  size  secure  full  economic 
eflaciency;  and  any  expansion  of  the  plant  beyond  this  point, 
unless  it  takes  the  form  of  a  complete  duplication  of  the  plant,  is 
more  likely  to  increase  operating  costs  than  to  reduce  them.^ 

1  Report  of  the  United  States  Tariff  Commission  on  Costs  of  Production  in 
the  Sugar  Industry,  p.  23. 

2  This  opinion  is  generally  held  by  leading  economists.  See  Taussig, 
Principles  of  Economics,  I,  p.  59;  Ely,  Monopolies  and  Trusts,  p.  165;  Bul- 
lock, Quarterly  Journal  of  Economics,  15,  p.  198;  and  Durand,  The  Trust 
Problem,  p.  69. 


5i6        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

This  follows  from  the  fact  that  a  plant  of  a  given  size  permits 
machinery  to  be  employed  in  the  most  effective  manner,  and 
permits  the  most  advantageous  subdivision  of  labor;  represents, 
in  a  word,  the  most  effective  combination  of  the  productive 
factors,  any  variation  from  which  increases  rather  than  decreases 
costs.  Failure  to  attain  this  effective  combination  of  the  produc- 
tive factors  means  high  costs  and  perhaps  bankruptcy.  Natu- 
rally, the  size  of  the  most  economic  plant  unit  varies  greatly  in 
different  industries.  Thus,  the  president  of  the  large  steel  firm  of 
Jones  and  Laughlin  stated  in  190 1  that  the  minimum  cost  in 
manufacturing  steel  was  not  secured  until  an  output  of  2,000  to 
2,500  tons  per  day  was  reached,  but  that  a  mill  with  this  large  an 
output  could  manufacture  as  cheaply  as  one  that  made  5,000 
tons  per  day.^  An  independent  refiner  of  cane  sugar  after 
considerable  experimentation  concluded  that  an  output  of  7,500 
barrels  a  day  was  the  most  economic  unit  in  this  industry.^  If 
the  trust  chooses  the  plant  unit  of  maximum  efhciency,  it  secures 
the  economies  of  large-scale  production;  if  it  fails  to  do  so,  it  does 
not  secure  these  economies.  Inefficiency  in  this  regard,  be  it 
noted,  may  more  than  counterbalance  all  the  savings  that  the 
trust  can  effect  in  other  ways,  namely,  those  economies  that  it 
realizes  through  the  fact  of  being  a  trust.  In  other  words,  the 
reduction  in  fixed  charges  per  unit  of  product  above  referred  to  is 
an  economy  of  large-scale  production  and  not  of  combination. 
If  there  be  any  industry  in  which  the  most  efficient  plant  unit  is 
one  producing  the  total  output,  there  will  be  in  that  industry  a 
strong,  probably  irresistible,  tendency  toward  monopoly;  ^  yet 
the  gains  of  monopoly  will  arise,  not  from  combination,  as  with 
the  trust,  but  from  large-scale  production.  In  this  industry  as  in 
all  others  there  should  be  no  interference  with  the  economic 
tendency  toward  large-scale  production,  yet  public  policy  would 
doubtless  demand  that  this  industry,   like  all  other  natural 

1  Industrial  Commission,  XIII,  p.  505.  On  the  tin  plate  industr>%  see 
Dunbar,  The  Tin-Plate  Industry,  p.  102. 

'Hearings  on  the  American  Sugar  Refining  Company,  1911-1912,  pp. 
1151-1152. 

'  The  cash  register  industry  may  be  one  of  this  type.    See  p.  529. 


ECONOMIES  OF  THE  TRUST  517 

monopolies,  be  brought  either  under  the  control  or  the  ownership 
of  the  state. 

III.     Economies    in   Selling 

The  economies  in  selling  may  be  discussed  under  the  following 
headings:  (i)  advertising;  (2)  traveling  salesmen;  (3)  export 
trade;  (4)  cross  freights;  (5)  bad  debts;  (6)  smaller  stock  of 
goods.  It  is  in  selling  costs  that  the  trust  apparently  finds  the 
best  opportunity  for  effecting  economies  that  represent  social 
gain. 

(i)  Advertising.  The  expenditure  for  advertising  under 
conditions  of  competition  is  enormous.  If  this  expenditure  had 
the  effect  of  stimulating  the  demand  for  commodities  and  thus 
of  permitting  large-scale  production,  it  is  possible  that  the  ex- 
pense of  advertising  might  be  compensated  for  by  reduced  pro- 
duction costs;  and  the  cost  and  price  of  the  article  need  not  be 
increased  on  account  of  advertising  expense.  While  this  is 
sometimes  the  case,  more  commonly,  no  doubt,  the  effect  of 
advertising  is  to  increase  the  sales  of  one  article  at  the  expense 
of  another.  When  this  is  the  result,  that  is,  when  advertising 
does  not  increase  purchases  but  merely  turns  them  into  different 
channels,  the  outlays  for  advertising  must  be  regarded  as  eco- 
nomic waste,  unless  indeed  the  advertised  article  happens  to  be 
better  than  the  one  that  would  have  been  purchased  had  it  not 
been  for  the  advertising.  The  social  costs  of  competition  on  the 
selling  side  are  undoubtedly  great;  and  their  reduction  is  ar- 
dently to  be  desired. 

Herein  lies  one  of  the  principal  advantages  of  the  trust.  The 
trust  with  the  greater  part  of  the  market  in  its  control  need  not 
expend  such  large  sums  to  induce  people  to  buy  its  product,  since 
in  large  measure  they  must  buy  from  it  as  the  principal  source 
of  supply.  Thus,  the  advertising  expenditures  of  the  tobacco 
trust  declined  as  its  monopoly  control  increased;  and  the  adver- 
tising expenditures  of  the  companies  that  succeeded  to  the  trust 
upon  its  dissolution  increased  as  compared  with  those  of  the 
trust.  Illustrating  the  first  point,  the  tobacco  trust  prior  to 
1900  controlled  approximately  55  per  cent  of  the  output  of 


5l8       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

little  cigars,  and  spent  on  advertising  about  lo  per  cent  of  its 
net  receipts  (from  little  cigars)  less  tax;  and  between  1905  and 
1908  it  controlled  approximately  85  per  cent  of  the  output,  and 
spent  only  about  i  per  cent  of  the  net  receipts  less  tax.^  In 
part  the  large  apparent  saving  resulted  from  the  fact  that  the 
expenditures  during  the  period  when  the  trust  was  building  up 
its  monopoly  control  were  abnormally  large, — larger  than  they 
would  be  under  normal  competitive  conditions.  Thus,  between 
1898  and  1903  the  trust  was  striving  to  obtain  a  monopoly  of 
the  manufacture  of  cigars,  and  in  the  latter  year  it  actually  ex- 
pended on  advertising  33.4  per  cent  of  its  net  receipts  less  tax.^ 
But  having  come  to  the  conclusion  that  economic  conditions 
did  not  favor  monopoly  in  the  manufacture  of  cigars,  the  trust 
gave  up  its  competitive  campaign,  and  by  1907  was  spending 
on  advertising  only  4.7  per  cent  of  its  net  receipts  less  tax.^  Il- 
lustrating the  second  point,  the  advertising  expenses  of  the  to- 
bacco trust  in  1910  in  all  branches  except  cigars  were  $10,895,- 
132,  while  those  of  the  successor  companies  (the  companies  that 
succeeded  to  the  business  of  the  trust  upon  its  dissolution) 
amounted  in  1913  to  $23,623,564,  or  more  than  double.*  Based 
upon  rates  per  thousand  or  per  pound  the  advertising  expendi- 
tures of  the  successor  companies  exceeded  those  of  the  trust  by 
percentages  varying  from  14  per  cent  (Turkish  cigarettes)  to 
155  per  cent  (plug  cut  smoking).^ 

These  increases  in  cost  seem  to  be  properly  laid  at  the  door 
of  dissolution;  they  represent  some  of  the  inevitable  wastes  of 
competition.  The  competitive  system,  of  course,  is  by  no  means 
perfect;  if  it  were  none  would  seriously  think  of  restraining  its 
influence.  And  chief  among  its  imperfections  is  the  waste  in- 
volved in  inducing  customers  to  buy  the  product  of  one  concern 
rather  than  of  another,  even  though  the  product  of  the  latter 
be  as  good  or  actually  better  than  that  of  the  former. 

Conceding  that  trusts  may  effect  savings  in  advertising,  it 

*  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  III,  p.  5. 

2  Ibid.  *  Ibid.,  p.  18. 

3  Ibid.  "^  Ibid. 


ECONOMIES  OF  THE  TRUST  519 

should  be  realized  that  this  saving  is  not  always  possible,  and 
when  it  is  possible  the  amount  of  the  saving  is  often  overesti- 
mated. Even  under  a  competitive  regime  there  were  some  ar- 
ticles that  were  not  advertised  to  any  considerable  extent,  since 
they  were  standard  in  character  and  in  insistent  demand.  Others 
were  marketed  almost  entirely  through  middlemen  or  a  few 
large  individual  consumers.  Still  others  were  purchased  as  the 
result  of  chemical  and  other  tests,  and  not  as  the  result  of  ad- 
vertising. Whenever  advertising  costs  were  negligible  under 
competitive  conditions,  there  was  no  opportunity  for  saving 
through  the  organization  of  a  trust.  For  example,  the  steel 
trust  hardly  effected  any  notable  economies  as  regards  the  ad- 
vertising of  steel  rails;  and  neither  did  the  sugar  trust  as  re- 
gards the  advertising  of  sugar. 

Again,  there  are  certain  articles  that  were  widely  advertised 
in  the  days  of  competition,  and  that  the  trust  still  finds  it  neces- 
sary to  advertise,  though  perhaps  on  a  reduced  scale.  Thus,  the 
tobacco  trust,  notwithstanding  the  fact  that  its  control  of  the 
plug  tobacco  output  increased  from  56.3  per  cent  in  1899  to  84.9 
per  cent  in  1910,  was  expending  on  advertising  in  the  latter  year 
6.5  per  cent  of  its  net  receipts  less  tax  as  against  only  4.8  per 
cent  in  1899.^  These  increased  expenditures  were  necessary  be- 
cause otherwise  the  public  might  have  consigned  chewing  tobacco 
to  everlasting  oblivion.  Other  trusts  that  have  found  it  necessary 
to  advertise  are  the  photographic  camera,  gunpowder,  glucose,- 
starch,  whisky,  silver-ware,  and  chewing  gum  trusts,  to  cite  but  a 
few.  The  managers  of  these  concerns  have  learned  that  their  sales 
fall  off  with  marked  rapidity,  once  they  fail  to  remind  the  pub- 
lic of  its  needs;  and  the  same  holds  true  in  considerable  measure 
of  all  trusts  except  those  producing  the  staple,  essential  articles. 
This  would  still  be  true,  even  if  all  industries  were  under  the 
control  of  100  per  cent  monopolies;  for  a  great  many  trusts, 
e.  g.,  the  camera,  watch,  tobacco,  silver- ware,  wall  paper,  alu- 
minum, and  bicycle  trusts,  would  still  be  in  competition  with 
each  other  for  the  trade  of  the  buyer,  and  each,  therefore,  would 

1  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
Dart  III,  p.  5. 


520       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

have  to  advertise  to  maintain  its  position.  The  trust,  therefore, 
has  found  that  it  may  easily  lose  more  through  reduced  sales 
than  it  gains  through  diminishing  advertising  expense. 

Another  group  of  trusts  embraces  those  that  spend  even 
more  on  selling  than  do  their  competitors.  Thus,  the  selling 
expenses  of  the  International  Harvester  Company  per  machine 
were  considerably  greater  than  those  of  the  independent  con- 
cerns.^ These  expenses  were  only  in  part  advertising,  to  be  sure, 
yet  no  doubt  its  advertising  expenses  were  greater  than  those 
of  its  competitors.  This  relatively  high  expense  resulted  ap- 
parently from  a  policy  of  increasing  the  volume  of  sales  by  the 
maintenance  of  an  elaborate  selling  organization  rather  than 
by  the  reduction  of  prices.  Undoubtedly  this  was  the  best 
policy  for  the  company,  yet  it  is  important  to  note  that  the  so- 
called  competitive  wastes  of  selling  were  not  eliminated  by  the 
establishment  of  a  trust. 

(2)  Traveling  salesmen.  Since  much  of  the  energy  of  travel- 
ing salesmen  was  directed  to  inducing  the  buyer  to  purchase  the 
goods  of  one  manufacturer  rather  than  another  it  was  only  to 
be  expected  that  with  the  establishment  of  a  trust  much  of  this 
personal  solicitation  could  be  eliminated.  The  whisky  trust,  for 
example,  dispensed  with  300  traveling  salesmen,  and  effected 
a  saving  of  $1,000,000  a  year  in  the  Kentucky  branch  alone.^ 
The  wire  trust  (the  American  Steel  and  Wire  Company)  dis- 
pensed with  about  200  traveling  salesmen.  In  other  cases  it 
was  found  possible  to  replace  high  grade  salesmen,  adepts  in 
persuasion,  with  reliable  but  less  expensive  individuals.  The 
Royal  Baking  Powder  Company  replaced  salesmen  receiving 
$4,000  to  $5,000  a  year  with  men  paid  less  than  $1,000  a  year.^ 
That  notable  savings  were  effected  was  admitted  in  substance 
by  Mr.  Dowe,  the  president  of  the  Commercial  Travelers' 
National  League.  He  estimated  in  testimony  before  the  Indus- 
trial Commission  that  more  than  35,000  salesmen  had  lost  their 

1  Report  of  the  Commissioner  of  Corporations  on  the  International  Har- 
vester Company,  p.  262. 

2  Industrial  Commission,  I,  pp.  829-830. 
5  Ibid.,  p.  32  (Testimony). 


ECONOMIES  OF  THE  TRUST  $21 

positions  as  the  result  of  the  organization  of  trusts,  and  that 
about  25,000  others  had  suffered  a  reduction  in  salary.^ 

That  trusts  may  reaUze  some  economies  in  this  fashion  is 
obvious.  As  with  advertising  expenditures,  however,  the  pos- 
sibility does  not  always  exist;  and  when  it  does  exist,  its  im- 
portance may  be  exaggerated.  In  some  cases  the  organization 
of  a  trust  did  not  lead  to  any  economy  in  this  direction.  The 
president  of  the  v/all  paper  trust  testified  that  it  sent  out  more 
traveling  salesmen  than  the  predecessor  companies;  ^  and  the 
president  of  the  silver-ware  trust,  that  it  sent  out  as  many,  and 
probably  more.^  Even  after  the  sugar  trust  was  formed  a  lead- 
ing competitor  (Arbuckle  Brothers)  employed  no  traveling 
salesmen."^  The  tin  plate  trust  achieved  no  important  saving  in 
this  way,  since  the  thirty-nine  companies  that  preceded  the 
trust  did  not  have  in  the  aggregate  more  than  ten  traveling 
salesmen.^ 

Even  when  the  possibility  of  a  saving  is  present  its  importance 
must  not  be  exaggerated.  The  wire  trust  did  succeed  in  reduc- 
ing its  force  of  salesmen,  yet  it  had  no  notion  that  it  could  suc- 
cessfully compete  with  the  Carnegie  Steel  Company,  if  the  latter 
saw  fit  to  engage  in  the  manufacture  of  wire  goods.  Apparently 
the  saving  in  salesmen  was  not  a  controlling  factor.  The  whisky 
trust  announced  large  savings,  yet  as  a  trust  was  distinctly 
unsuccessful.  There  is  reason  to  believe  that  the  trust  organizers 
and  officials  in  the  first  flush  of  their  enthusiasm  overestimated 
the  possible  savings.  This  is  substantially  conceded  by  Mr. 
Flint,  the  organizer  of  a  number  of  trusts.  Testifying  before 
the  Industrial  Commission  he  said  that  in  many  cases  trusts 
had  undertaken  to  secure  too  great  economies,  and  had  thereby 

1  Industrial  Commission,  I,  p.  27  (Testimony).  No  doubt  there  is  included 
in  these  totals  those  salesmen  who  had  been  employed  by  combinations 
popularly  referred  to  as  trusts,  yet  not  possessing  monopoly  power. 
Mr.  Dowe  therefore  exaggerated  the  savings  resulting  from  the  organiza- 
tion of  trusts. 

2Ibid.,  XIII,  p.  292. 

3  Ibid.,  I,  p.  1059. 

^Ibid.,  I,  p.  147  (Testimony). 

6  Ibid.,  I,  p.  877. 


52  2        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

diminished  the  eflSciency  of  the  selling  department  and  reduced 
the  sales  in  proportion.^  The  rubber  goods  trust,  which  he  had 
organized,  avoided  this  difficulty.  The  policy  of  its  manage- 
ment was  to  sustain  the  individuality  and  independence  of  each 
concern,  even  at  greater  expense,  since  experience  had  shown, 
he  maintained,  that  it  was  not  advantageous  to  attempt  to  secure 
the  last  economy.  It  is  probable  also  that  the  trust  managers 
failed  to  allow  sufficiently  for  the  contribution  of  their  salesmen. 
As  Professor  Dewing  well  puts  it:  "Few  things  count  more  in 
salesmanship  than  the  personal  magnetism  of  an  able  salesman 
basing  his  appeal  on  long  established  trade  connections.  The 
directors  of  the  consolidation  sought  in  the  interest  of  organiza- 
tion and  economy  to  replace  high  salaried  salesmen  by  low  paid 
order  clerks.  Many  of  these  salesmen  had  been  the  proprietors 
of  the  old  businesses,  men  who  held  their  customers  by  family 
association.  .  .  .  'Among  the  oldest  houses  doing  business  with 
us'  was  a  bond  which  the  force  of  circumstances  broke  with 
difficulty.  Instead  of  profiting  through  this  bond  the  new  order 
of  scientific  salesmanship  interposed  the  deadening  influence  of 
organization  between  buyer  and  seller.  Customers  found  that 
they  were  no  longer  dealing  with  the  son  of  their  old  friend,  but 
with  some  cog  in  the  machine  designated  as  A  B  C.  .  .  .  As  a 
result  they  often  turned  elsewhere."  " 

(3)  Export  trade.  Much  has  been  made  of  the  advantage  of 
the  trust  in  developing  the  export  trade.  The  president  of 
the  American  Steel  Hoop  Company  (the  hoop  trust)  maintained 
that  his  organization  was  able  to  develop  foreign  business  in  a 
way  not  open  to  smaller  concerns;  that  the  company's  large  cap- 
ital and  business  made  it  possible  for  it  to  spend  large  sums  in 
pioneering,  and  to  employ  agents  all  over  the  world.  The  same 
claim  was  made  for  the  United  States  Steel  Corporation,  or- 
ganized two  years  later  as  a  combination  of  a  number  of  steel 
combinations  and  trusts,  including  the  American  Steel  Hoop 
Company.  Other  trusts  which  have  emphasized  the  importance 
of  capturing  foreign  trade,  and  the  necessity  of  a  trust  for  that 

1  Industrial  Commission,  XIII,  p.  35. 

-  Corporate  Promotions  and  Reorganizations,  p.  561. 


ECONOMIES  OF  THE  TRUST  $23 

purpose,  are  the  harvester,  tobacco,  and  oil  trusts.  In  t'ae  or- 
ganization of  some  trusts,  however,  no  pretense  was  made  that 
the  expansion  of  the  export  trade  had  anything  to  do  with  the 
formation  of  the  trust.  The  sale  of  tin  plate  in  the  world's 
markets  was  regarded  as  a  possibility  only  in  the  "long  future  " ;  ^ 
and  an  export  trade  in  rubber  shoes  was  not  anticipated,  since 
the  raw  material  had  to  be  imported,  and  since  the  manufacture 
was  carried  on  largely  by  hand  labor  paid  the  high  American 
wage  scale.^ 

The  export  trade  may  be  developed  in  two  ways:  (i)  By  the 
normal  and  proper  process  of  offering  a  good  article  at  a  reason- 
able price  under  conditions,  such  as  provision  of  credit  facilities, 
that  make  it  desirable  and  possible  for  the  foreign  consumer  to 
purchase.  To  build  up  trade  in  this  way  may  necessitate  a 
study  of  the  needs  of  foreign  buyers,  and  perhaps  an  intensive 
campaign  to  convince  them  of  the  advantages  of  the  American 
product.  (2)  By  resort  to  the  practice  of  dumping,  that  is,  the 
sale  of  the  exported  article  at  a  lower  price  than  is  charged  at 
home. 

So  far  as  the  latter  method  is  concerned,  the  trust  undoubtedly 
has  an  advantage  over  concerns  in  industries  that  are  character- 
ized by  competitive  conditions,  assuming,  of  course,  that  a  high 
tariff  barrier  prevents  the  dumped  article  from  being  returned 
to  this  country.  The  trust  can  afford  to  sell  a  part  of  its  output 
abroad  at  a  comparatively  low  price,  since  the  gain  that  results 
from  maintaining  the  domestic  price  largely  accrues  to  it; 
whereas  an  individual  concern  can  not  do  this,  since  it  would 
be  mainly  its  competitors  that  would  profit  by  the  maintenance 
of  a  high  price  in  the  home  country.  The  justification  ordi- 
narily offered  by  the  trust  for  favoring  the  foreign  consumer  as 
compared  with  the  domestic  consumer  is  that  the  sale  of  a  part 
of  the  product  abroad,  even  at  lower  prices  than  at  home,  is 
profitable  to  the  trust,  since  it  permits  operation  at  capacity 
and  thus  at  lower  cost;  and  is  advantageous  to  the  public,  since 
it  gives  steadier  employment  to  labor  and  reduces  the  fixed 

'  President  Reid  in  Industrial  Commission,  I,  p.  882. 
2  Industrial  Commission,  XIII,  pp.  80-81. 


524       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

expenses  per  unit  of  product.  In  analyzing  this  point  and  its 
relation  to  trust  economy  it  may  be  inquired  whether  the  dump- 
ing practiced  by  the  trust  is  to  be  sporadic  or  regular.  If  the 
former,  it  is  clear  that  the  trust  would  not  succeed  in  building 
up  an  export  trade;  for  obviously  it  is  not  possible  to  develop 
the  export  market  by  sales  to  foreign  customers  only  at  those 
times  when  the  home  market  will  not  absorb  the  whole  output 
at  satisfactory  prices.  Foreign  consumers,  if  treated  in  this 
fashion,  will  turn  elsewhere  for  their  major  purchases.^  If, 
on  the  other  hand,  the  dumping  is  to  be  permanent,  what  be- 
comes of  the  argument  that  operation  at  capacity  and  steadier 
employment  to  labor  is  possible?  Clearly  there  is  no  special 
virtue  in  foreign  sales  persistently  carried  on,  except  the  general 
advantage  that  comes  from  having  a  wider  market,  that  enables 
a  company  engaged  in  foreign  trade  to  avoid  those  recurrent 
periods  when  the  producing  capacity  exceeds  the  demands  of 
the  market.  Suppose  the  foreign  trade  plus  the  domestic 
trade  equals  the  productive  capacity  of  the  country  in  any 
particular  line.  If  the  demand  for  the  product  increases,  as  it 
normally  does  in  a  growing  country  like  our  own,  the  productive 
capacity  in  time  will  be  increased  to  take  care  of  the  demand; 
when  the  demand  declines,  as  it  does  at  irregular  intervals  for 
nearly  every  commodity,  an  excess  capacity  will  temporarily 
appear.  The  fact  that  the  trust  has  established  a  permanent 
foreign  business  through  a  persistent  policy  of  dumping  will 
not  prevent  the  occasional   emergence  of  surplus  producing 

^  This  would  be  less  true  of  such  exports  as  steel  products  than  it  would  be 
of  cigarettes,  or  binders  and  binders'  parts.  Nevertheless  we  have  the  testi- 
mony of  Mr.  Farrell,  the  president  of  the  Steel  Corporation,  that  it  is  true  of 
steel  products  also.  Testifying  in  the  government  suit  he  declared  that  it 
was  impossible  to  develop  a  foreign  business  unless  it  was  done  continuously, 
because  buyers  would  refuse  to  patronize  concerns  that  were  not  in  a  position 
to  serve  as  a  continuous  source  of  supply.  Brief  for  the  United  States  in 
United  States  v.  United  States  Steel  Corporation  (no.  481),  vol.  II,  p.  614. 
Having  long  been  in  charge  of  the  exports  of  the  Steel  Corporation,  Mr. 
Farrell  was  in  a  position  to  know  whereof  he  spoke.  For  further  evidence 
see  Report  of  the  Federal  Trade  Commission  on  Cooperation  in  American 
Export  Trade,  I,  pp.  374-375- 


ECONOMIES  OF  THE  TRUST  '      525 

capacity.  The  trust  may,  to  be  sure,  temporarily  secure  relief 
by  sporadic  dumping  designed  to  attract  a  new  set  of  foreign 
buyers,  yet  this,  as  has  just  been  pointed  out,  does  not  conduce 
to  the  permanent  development  of  our  foreign  trade. 

It  may  be  inquired  next  what  advantages  the  trust  has  with 
regard  to  what  we  have  called  the  normal  and  proper  method 
of  developing  export  trade.  Perhaps  the  principal  condition 
prerequisite  to  the  capturing  of  foreign  trade  is  the  possession  of 
abundant  financial  resources.^  In  developing  the  foreign  market 
it  may  be  necessary  to  create  an  extensive  organization  and  to 
make  large  outlays  in  the  form  of  advertising,  sales  agencies, 
and  so  forth;  and  to  retain  the  foreign  market  an  extension  of 
credits  will  probably  be  necessary.  Only  a  concern  with  large 
capital  can  expect  to  succeed  in  such  an  undertaking.  However, 
this,  as  the  Industrial  Commission  stated,  "does  not  necessarily 
imply  monopoly."  ^  Much  has  been  said  about  foreign  trade  in 
connection  with  the  International  Harvester  Company.  Yet  the 
McCormick  and  Deering  harvester  companies  prior  to  the  organ- 
ization of  the  trust  were  expanding  the  foreign  trade  very  rapidly.' 

1  We  shall  not  discuss  such  essential  conditions  as  the  building  up  of  a 
reputation  for  honesty  and  quality,  and  the  manufacture  of  goods  to  meet 
the  particular  wants  of  foreign  peoples.  These  do  not  appear  to  have  any 
special  relation  to  the  trust  problem.  For  the  same  reason  we  may  omit 
discussion  of  such  matters  as  the  provision  of  banking  facilities  abroad,  the 
maintenance  of  an  American  merchant  marine,  and  American  investments 
in  foreign  securities. 

2  Industrial  Commission,  I,  p.  23  (Digest). 

'  Brief  for  the  United  States  in  International  Harvester  Company  v. 
United  States  (no.  757),  pp.  124-125.  The  officials  of  the  International 
Harvester  Company  pointed  out  that  the  foreign  trade  in  harvesters  up  to 
1902  was  handled  through  foreign  jobbers,  who  generally  bought  for  cash  and 
sold  to  the  owners  of  large  estates  on  the  same  terms;  and  they  claimed  that 
this  method  of  selling  machines  could  not  be  successfully  employed  with 
small  farmers,  especially  in  the  newly  developed  countries  that  needed 
machines  the  most.  To  reach  this  group  it  was  necessary  to  establish  branch 
houses  with  large  stocks,  and  to  sell  direct  to  the  farmer  on  credit;  and  this 
involved  a  more  elaborate  selling  organization  and  greater  resources  than  did 
the  jobbing  system  of  distribution,  in  fact,  greater  resources  than  any  Ameri- 
can company  possessed.  Brief  for  the  International  Harvester  Company  in 
International  Harvester  Company  v.  United   States  (no.  56),  pp.  54-56- 


526        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Whether  the  trust  increased  this  trade  more  rapidly  than  sepa- 
rate companies  would  have  done  a  federal  court  found  to  be  a 
"mere  matter  of  speculation."  ^  It  is  quite  probable  that  it 
did,  yet  it  is  significant  that  in  1913,  under  some  pressure,  to 
be  sure,  from  the  government,  the  foreign  business  (with  the 
new  Hnes)  was  turned  over  to  a  newly  organized  corporation 
(the  International  Harvester  Corporation)  which  certainly  was 
not  a  trust.  To  give  another  illustration,  the  Plymouth  Cord- 
age Company,  an  independent  cordage  concern,  sold  its  prod- 
ucts "nearly  all  over  the  world."  ^  Trusts  in  general,  it  may 
be  conceded,  are  more  likely  to  have  the  requisite  capital  to 
promote  export  dealings,  yet  even  individual  concerns  may  be 
well  fortified  in  this  regard.  Moreover,  under  the  Webb- 
Pomerene  Act  they  may  now  combine  to  this  end  without  violat- 
ing the  anti-trust  laws.^ 

Another  prerequisite  is  the  possession  of  an  output  sufficiently 
large  to  justify  a  foreign  organization  service.  Practically  every 
trust,  of  course,  could  qualify  on  this  score,  yet  so  could  many 
large  individual  concerns  and  most  important  combinations. 
If  not,  it  is  now  legal  under  the  Webb  Act  to  cooperate  for 
this  purpose. 

In  competing  for  foreign  business  there  is  an  advantage  in 
possessing  strategically  located  plants.  The  Standard  Oil 
Company  with  a  refinery  at  Bayonne,  New  Jersey,  the  American 
Tobacco  Company  with  a  factory  at  New  York  City,  and  the 
International  Harvester  Company  with  a  plant  at  Auburn, 
New  York,  were  well  situated  in  this  respect.  However,  there  is 
obviously  nothing  to  prevent  a  mere  combination  from  distribut- 
ing its  plants  with  an  eye  to  the  export  trade,  and  nothing  to 
prevent  an  individual  enterprise  locating  its  plant  in  such 
manner  that  it  can  effectively  engage  in  foreign  commerce.  The 
Bethlehem  Steel  Corporation,  for  example,  is  better  off  in  this 
respect  than  the  Steel  Corporation,  since  its  rail  haul  to  the 
Atlantic  seaboard  is  less. 

There  is  a  further  advantage  in  some  instances  in  manufactur- 

1  214  Fed.  Rep.  993.  2  j^dustrial  Commission,  XIII,  p.  140. 

'  See  ch.  16. 


ECONOMIES  OF  THE  TRUST  '      527 

ing  a  variety  of  products.  A  sugar  or  a  starch  trust  would  have 
little,  if  any,  advantage  in  this  regard  over  an  individual  concern; 
but  a  steel,  harvester,  or  cash  register  trust  manufacturing  a  full 
line  might  have  a  considerable  advantage  over  a  concern  that 
manufactured,  let  us  say,  only  wire  products.  The  president  of 
the  Steel  Corporation  declared  that  it  would  have  been  knpos- 
sible  for  the  constituent  companies  of  the  Corporation,  had  they 
remained  distinct,  to  have  developed  the  foreign  trade  as  the 
Corporation  has  done;  that  a  concern  to  do  a  successful  foreign 
business  must  be  able  to  offer  all  lines  of  products,  since  one  prod- 
uct sells  another  and  since  the  buyer  usually  wishes  to  secure  his 
whole  supply  from  one  source.^  There  is  much  force  in  this 
contention,  though  the  enactment  of  the  Webb  law  should  do 
much  toward  placing  less  far-reaching  concerns  in  a  more 
favorable  position  in  this  regard. 

The  lunitations  on  the  ability  of  trusts  to  develop  exports 
should  be  borne  in  mind.  The  product  of  some  industries  is  not 
suitable  for  export,  or  at  least  is  not  exported.  The  exports  of 
anthracite  coal  and  salt,  and  no  doubt,  of  tin  cans,  are  so  small 
that  there  is  not  a  particle  of  justification  for  a  trust  in  these 
branches  on  the  score  of  their  ability  to  build  up  the  export  trade 
more  effectively.  In  other  branches  of  industry,  though  there  is 
nothing  in  the  nature  of  the  product  to  prevent,  even  a  trust  fails 
to  develop  the  export  trade.  The  sugar  trust  illustrates  this  case; 
its  exports  up  to  the  period  of  the  war  were  an  insignificant  pro- 
portion of  its  total  sales.  The  exports  of  tobacco  products  other 
than  cigarettes  are  quite  small.  Again,  in  a  few  instances  the 
export  business  is  deliberately  sacrificed  as  a  means  of  keeping 
foreign  manufacturers  out  of  the  home  market.  The  powder 
trust,  for  example,  entered  into  an  international  agreement  in 
1897,  to  last  for  ten  years,  whereby  it  agreed  in  return  for  a 
monopoly  of  certain  territory  to  sell  no  high  explosives  in  Europe, 
Africa,  or  Asia.^ 

1  Brief  for  the  Steel  Corporation  in  United  States  v.  the  United  States  Steel 
Corporation  (no.  481),  p.  116. 

2  Petitioner's  record  in  United  States  v.  E.  I.  du  Pont  de  Nemours  and 
Company  (no.  280),  Exhibits,  vol.  II,  pp.  11 23-1 132. 


528       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Concluding  with  regard  to  this  economy,  it  appears  that  in 
some  branches  of  industry  the  trusts  when  first  estabhshed  were 
better  situated  to  develop  the  export  trade  than  their  predeces- 
sors, but  that  with  the  passage  of  the  Webb-Pomerene  Act  this 
advantage  has  been  much  reduced,  and  may  largely  disappear. 

(4)  Cross  freights.    The  trust,  owning  a  number  of  plants  can 
supply  the  market,  it  is  said,  from  the  nearest  plant,  thus  saving 
cross  freights.     The  president  of  the  wire  trust  estimated  the 
cross  freights  at  $500,000  a  year,  and  claimed  a  saving  in  this 
way  through  the  establishment  of  the  trust.^   In  the  salt  industry 
a  large  percentage  of  the  price  is  made  up  of  the  freight  rate,  and 
the  trust,  so  it  is  averred,  made  an  enormous  saving.^    When  the 
product  to  be  shipped  is  bulky,  the  trust  may  achieve  an  econ- 
omy in  this  regard,  though  there  are  a  number  of  considerations 
that  reduce  the  importance  of  cross  freights  as  a  trust  economy. 
First,  a  combination  not  possessing  monopoly  power,  yet  owning 
a  number  of  well-distributed  plants,  can  also    reduce    cross 
freights;  the  gain  realized  by  the  trust  is  only  the  additional 
saving  that  is  not  open  to  the  combination.^     Second,  if  the 
monopolized  article  has  large  bulk  in  proportion  to  its  value, 
that  is,  if  the  freight  rate  is  an  important' element  in  determining 
the  price,  the  plants  are  likely  to  be  widely  dispersed  prior  to  the 
organization  of  the  trust;  and  thus  the  possible  saving  is  less  than 
might  at  first  thought  appear.     The  manufacture  of  tin  cans 
supplies  an  excellent  illustration.     Third,  if  the  monopolized 
article  has  high  value  in  proportion  to  its  bulk,  that  is,  if  the 
freight  rate  is  relatively  unimportant,  the  trust  can  save  little. 
So  far  as  cross  freights  are  concerned,  there  is  little  to  be  gained 
through  the  organization  of  trusts  in  the  watch,  whisky,  tobacco, 
thread,  chewing  gum,  and  silver-ware  industries.    In  the  silver- 
ware industry  not  only  were  transportation  charges  relatively 

1  Industrial  Commission,  I,  p.  1030. 

2  Montague,  Trusts  of  To-Day,  pp.  65-66.  See  also  Industrial  Commis- 
sion, XIII,  p.  253. 

3  The  National  Steel  Company,  a  large  combination,  but  not  a  trust, 
claimed  economies  through  the  elimination  of  cross  freights.  Industrial 
Commission,  I,  p.  947. 


ECONOMIES  OF  THE  TRUST  '       529 

unimportant,  but  the  plants  of  the  trust  were  so  concentrated  in 
a  particular  locality  that  one  plant  could  supply  the  market  as 
well  as  another.  Fourth,  there  are  some  industries  in  which  the 
economies  of  large-scale  production  are  apparently  so  great  that 
it  is  advantageous  to  concentrate  the  entire  output  in  one  plant. 
For  example,  the  National  Cash  Register  Company  makes  all  its 
cash  registers  at  Dayton,  Ohio.  Obviously  it  can  not  save  any- 
thing by  the  elimination  of  cross  freights.  Fifth,  in  some  indus- 
tries the  location  of  the  plants  is  determined  by  natural  factors 
that  permit  of  no  saving  in  cross  freights.  The  best  illustration 
perhaps  is  the  anthracite  coal  industry,  an  industry  character- 
ized by  a  very  high  degree  of  localization  based  on  natural  condi- 
tions. Finally,  a  saving  in  cross  freights  is  possible  to  only  a 
limited  degree,  if  at  all,  in  those  cases  in  which  a  trust  has  secured 
the  economies  that  result  from  specialization.  If  the  steel  hoop 
trust  chooses  to  manufacture  all  of  its  hoops  of  a  certain  size  in 
one  factory  to  secure  the  economies  of  large-scale  production,  it 
must  supply  the  entire  market  from  that  particular  factory,  and 
can  therefore  save  nothing  in  cross  freights.  Again,  if  the  to- 
bacco trust,  prior  to  its  dissolution,  found  it  advantageous  to 
manufacture  four-fifths  of  its  cigarettes  in  three  factories,^  none 
of  which  was  200  miles  west  of  the  Atlantic  Ocean,  it  must  be 
because  it  chose  to  realize  the  economy  of  large-scale  production 
rather  than  of  lower  freight  rates.  This  is  the  situation,  it  should 
be  noted,  whenever  a  concern  concentrates  a  particular  brand, 
whether  it  be  tobacco,  starch,  or  what  not,  in  one  factory. 

(5)  Bad  debts.  The  trust,  not  being  subject  to  the  pressure  of 
competition  to  the  same  degree,  can  avoid  undue  extensions  of 
credits  to  purchasers,  and  thus  need  not  sustain  such  large  losses 
in  the  way  of  bad  debts.  The  stock  illustration  is  the  American 
Steel  and  Wire  Company,  which  reduced  its  percentage  of 
loss  from  bad  debts  from  one-half  of  one  per  cent  to  one-twenty- 
fifth  of  one  per  cent.  Undoubtedly  many  trusts  have  been  able 
to  save  in  this  way,  yet  clearly  the  saving  is  slight.  Moreover, 
some  trusts,  notably  the  harvester  trust,  find  it  necessary  to 

1  Report  of  the  Commissioner  of  Corporations  on  the  Tobacco  Industry, 
part  I,  p.  340, 


530       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

make  wide  extensions  of  credit  even  at  the  risk  of  some  loss.  It 
is  safe  to  say  that  no  trust  which  would  not  have  been  formed 
otherwise  would  be  formed  in  order  to  reduce  the  loss  from  bad 
debts. 

(6)  Smaller  stock  of  goods.  The  trust  by  virtue  of  the  fact 
that  it  covers  the  country  and  handles  such  a  large  percentage 
of  the  total  output  does  not  need  to  carry  such  large  stocks;  its 
managers  are  in  a  better  position  to  gauge  the  requirements  of 
the  market.  In  so  far,  moreover,  as  the  trust  promotes  the 
standardization  of  parts,  it  reduces  the  quantity  of  stocks  re- 
quired. The  reduction  in  stocks  naturally  means  a  saving  in 
interest,  insurance,  storage,  and  shop  wear  charges. 

Disadvantages  of  The  Trust  Form  of  Organisation 

Having  enumerated  the  economies  of  the  trust  form  of  organ- 
ization, and  examined  the  extent  to  which  they  are  of  signifi- 
cance, we  may  turn  to  a  consideration  of  certain  factors  that  act 
as  an  offset  to  these  economies  and  tend,  in  so  far  as  they  have 
weight,  to  make  the  trust  an  actually  less  efficient  business  unit, 
particularly  when  viewed  over  a  long  period  of  time.  These 
countervailing  factors  are:  (i)  the  scarcity  of,  or  failure  to  se- 
cure, the  high  order  of  administrative  ability  required  in  the 
management  of  a  trust;  (2)  the  difficulty  of  enlisting  the  best 
services  of  the  operating  officials;  (3)  the  tendency  of  monopoly 
toward  stagnation;  (4)  the  additional  financial  outlays  to  which 
trusts  are  subjected;  and  (5)  the  burden  of  a  highly  centralized 
administrative  machinery. 

(i)  The  first  consideration  that  calls  into  question  the  supe- 
rior efficiency  of  the  trust  as  a  business  unit  is  the  scarcity  of  that 
high  grade  of  executive  and  administrative  ability  that  is  re- 
quired to  manage  a  business  of  the  dimensions  and  ramifications 
of  the  trust.^  Few  of  the  men  who  can  manage  a  single  mill  with 
a  high  degree  of  efficiency  can  manage  a  combination  of  mills 
successfully;  and  very  few  of  those  who  can  manage  a  com- 
bination successfully  can  do  the  same  for  such  an  all-embracing 

1  For  some  opinions  of  business  men  on  this  point,  see  Industrial  Commis- 
sion, XIII,  pp.  84,  133. 


ECONOMIES  OF  THE  TRUST  53 1 

combination  as  the  trust.  This  point  of  view  has  been  well  ex- 
pressed by  President  Hadley.  "Just  as  in  an  army  there  are 
many  who  can  fill  the  position  of  captain,  few  who  can  fill  that 
of  colonel,  and  almost  none  who  are  competent  to  be  generals  in 
command — so  in  industrial  enterprise  there  are  many  men  who 
can  manage  a  thousand  dollars,  few  who  can  manage  a  million, 
and  next  to  none  who  can  manage  fifty  million. "  ^  The  mere 
work  of  centralized  administration,  he  said,  puts  a  tax  upon  the 
brains  of  men  who  are  accustomed  to  a  smaller  range  of  duties, 
which  very  few  find  themselves  able  to  bear.  There  can  be  no 
doubt  that  through  organization,  aided  by  modern  methods  of 
prompt  communication,  the  effective  directing  power  of  the  ad- 
ministrator has  been  much  inceased.  Nevertheless  even  the 
best  organization  requires  direction  and  supervision.  The  suc- 
cess or  failure  of  an  enterprise,  in  fact,  is  usually  determined  by 
one  man;  and  there  is  a  definite  limit  to  what  one  man  can 
do.  The  increase  in  the  size  of  the  business,  particularly  one 
extending  over  a  wide  area,  increases  greatly  the  number  and 
variety  of  the  problems  that  an  executive  has  to  solve,  and  makes 
it  more  difficult  for  him  to  exercise  a  sound  judgment  upon 
them.  Moreover,  the  consequences  of  errors  in  judgment  are 
particularly  harmful,  since  they  affect  a  whole  industry,  in- 
stead of  merely  a  single  plant. 

If  it  be  granted  that  there  are  executives  able  to  administer 
a  trust  effectively  in  competition  with  a  less  ambitious  under- 
taking, the  question  would  remain  whether  they  could  be  in- 
duced to  serve  as  the  salaried  heads  of  the  trust.  "Captains  of 
industry"  have  been  known  to  refuse  to  accept  positions  at 
princely  salaries,  because  of  their  unwillingness  to  be  held  in 
leading  strings.  The  story  is  told  of  a  prominent  business  man 
who  indignantly  rejected  an  offer  of  $100,000  a  year,  on  the 
ground  that  he  was  expected  to  serve  as  office  boy.  Such 
individuals  prefer  to  be  their  own  masters;  and  if,  as  seems  prob- 
able, the  supply  of  capital  seeking  investment  is  increasing 
more  rapidly  than  the  superior  grade  of  administrative  ability 
required  to  manage  a  trust,  they  will  be  in  a  fair  way  to  realize 
*  Scribner's,  26,  p.  607. 


532        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

their  wishes,  and  thus  the  trust  may  suffer  from  inferior  man- 
agement. The  same  applies,  of  course,  to  that  much  larger 
number  of  capable  business  men  who  have  the  choice  of  holding 
responsible  positions  as  salaried  trust  officials  of  one  kind  or 
another,  or  of  being  heads  of  individual  enterprises.  On  the 
other  hand,  it  may  be  said  with  reason  that  the  trust  could 
readily  enlist  in  its  service  the  most  capable  administrators  by 
granting  them  the  fullness  of  authority  that  they  crave.  The 
administration  of  the  affairs  of  a  trust  is  a  task  of  great  magni- 
tude; and  it  may  perhaps  be  presumed  that  the  owners  or  di- 
rectors of  the  trust,  rather  than  rely  upon  inferior  leadership, 
would  give  to  the  executive  head  as  free  a  rein  as  was  necessary 
to  attract  the  best  talent. 

Granting,  then,  that  the  requisite  administrative  ability  ex- 
ists and  that  it  may  be  enlisted,  it  does  not  follow  that  it  will 
be  enlisted.  There  is  a  possibility  that  the  administration  of 
the  trust  properties  will  be  turned  over  to  "friends  rather  than 
experts";  that  the  relatives  of  large  stockholders  or  other  finan- 
cial interests  will  be  taken  care  of  to  the  detriment  of  the  busi- 
ness. There  is  the  same  possibility,  of  course,  in  individual 
enterprises;  in  fact,  the  smaller  the  business  the  greater  is  the 
danger  that  personal  favoritism  will  dictate  the  appointments 
to  the  higher  positions.  Nevertheless  in  smaller  businesses  the 
necessity  for  an  unusual  grade  of  talent  is  less  pressing,  and 
there  would  appear,  moreover,  to  be  more  ground  for  expecting 
the  son  of  a  moderately  capable  business  man  to  equal  his  father 
in  ability  than  there  would  be  to  expect  the  same  result  in  the 
case  of  a  business  man  of  unusual  capacity.  Genius,  as  has 
been  well  said,  rarely  breeds  genius. 

Granting  all  the  foregoing  points,  the  future  alone  could  de- 
termine whether  there  will  be  a  continuing  supply  of  adminis- 
trative leaders  to  serve  as  trust  managers.  It  must  be  remem- 
bered that  the  heads  of  the  trusts  when  first  organized  were  men 
bred  in  the  competitive  struggle.  Such  degree  of  success  as  the 
trusts  have  achieved  to  date  may  result  from  the  fact  that  they 
have  been  able  to  command  the  high  order  of  talent  that  is 
trained  in  the  rigorous  competitive  school.    Were  industry  to  be 


ECONOMIES  OF  THE  TRUST  533 

free  from  the  competitive  pressure,  it  is  conceivable  that  busi- 
ness undertakings  would  show  a  tendency  to  a  reduced  scale, 
because  of  the  difficulty  of  securing  the  requisite  executive  lead- 
ership. As  one  writer  has  put  it,  "the  development  of  a  high 
order  of  undertaking  genius  in  the  few  seems  ...  to  depend 
upon  a  wide  range  of  undertaking  experience  in  the  many." 
If  this  be  so,  the  removal  of  the  educational  ladder  up  which 
developing  geniuses  may  climb  might  have  serious  social  conse- 
quences. That  no  such  results  are  to  be  anticipated  in  the  im- 
mediate future  results  from  the  fact  that  the  great  mass  of  in- 
dustry is  still  more  or  less  competitive.  This  holds  true  even 
of  certain  branches  that  were  once  controlled  by  trusts;  for  in  a 
number  of  industries,  whether  because  of  the  unimportance  of 
the  economies  of  the  trust  form  or  because  of  the  failure  to  se- 
cure the  best  leadership,  the  endeavor  to  maintain  a  monopo- 
listic control  has  been  a  failure. 

(2)  Even  if  the  trust  can  overcome  the  difficulties  just  de- 
scribed it  is  doubtful,  it  is  said,  whether  it  can  enlist  the  best 
services  of  its  leading  officials.  A  salaried  employee,  say  a 
manager  or  a  superintendent,  is  hardly  likely,  it  is  claimed,  to 
give  such  close  personal  attention  to  a  plant  in  which  he  has  no 
large  financial  interest  as  is  an  individual  who  owns  the  plant. 
The  weakness  of  the  trust  on  this  score  was  conceded  by  Mr. 
Flint,  the  promoter  of  a  number  of  trusts.  He  said,  "One  of 
the  fundamental  difficulties  of  the  management  of  these  corpo- 
rations lies  in  the  fact  that  the  managers  have  a  smaller  percen- 
tage of  interest  in  the  operations  that  they  are  conducting  under 
the  plan  of  an  industrial  combination  than  they  had  when  it 
was  an  individual  property  or  when  they  had  a  large  interest  in 
a  small  corporation.  That  is  fundamental.  There  is  no  way  in 
which  that  condition  can  be  changed. "  ^ 

The  most  effective  way  in  which  the  trust  can  enlist  the  inter- 
est of  its  salaried  officials,  as  Mr.  FHnt  pointed  out,  appears  to  be 
the  introduction  of  comparative  cost  systems  and  the  grant  to 
the  officials  of  a  financial  interest  in  the  business.    The  adoption 

1  Industrial  Commission,  XIII,  p.  85.  For  further  testimony  of  business 
men,  see  ibid.,  I,  p.  899,  and  XIII,  p.  158. 


534       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

of  comparative  cost  systems  may  be  expected  to  bring  good  re. 
suits,  either  by  appealing  to  the  spirit  of  emulation,  the  desire  to 
make  a  better  showing  than  one's  fellows;  or  by  appealing  to  the 
spirit  of  fear,  the  dread  of  losing  one's  position.  The  grant  of  a 
financial  interest  in  the  business,  perhaps  through  a  salary  based 
on  output  or  cost,  may  also  be  expected  to  stimulate  the  interest 
and  efforts  of  the  salaried  officials.  Yet  it  is  not  always  feasible 
to  pay  salaries  based  upon  output,  costs,  or  profits,  as  the  case 
may  be;  and  even  when  it  is  feasible  it  is  doubtful  whether  the 
spur  is  fully  adequate.  So  long  as  the  salaried  official  has  merely 
a  stake  in  the  profits,  and  does  not  have  to  bear  the  losses,  if 
they  materiaUze,  he  has  not  the  double  incentive  that  the  owner 
of  a  business  has.  The  salaried  official,  to  be  sure,  may  also  own 
stock  in  the  enterprise,  and  thus  have  an  additional  reason  for 
putting  forth  his  best  efforts.  In  this  event  the  contrast  between 
a  trust  and  an  independent  enterprise  is  not  so  striking,  although 
the  relationship  between  the  efforts  of  a  high  official  in  a  trust 
and  his  profits  is  not  likely  to  be  as  close  as  the  relationship 
between  the  efforts  of  the  head  of  an  independent  business  and 
his  profits. 

Concerns  with  a  single  plant,  and  to  a  lesser  degree  moderate- 
sized  combinations,  realize  a  further  gain  in  that  they  can  locate 
their  executive  force  in  close  contact  with  the  plant  or  plants; 
whereas  trusts  (and  large  combinations)  must  usually  have  their 
executive  (and  sales  offices)  separated  from  the  manufacturing 
properties.^  The  farther  removed  the  directing  staff  is  from  the 
operating  branch,  the  more  difficult  does  it  become  to  check  up 
on  the  work  of  the  various  plant  managers.  As  one  manufac- 
turer put  it,  "  there  comes  a  point  where  the  man  in  the  twentieth 
story  of  an  office  building  cannot  make  up,  no  matter  how 
brilUant  he  may  be,  for  the  waste  and  shiftlessness  of  a  variety 
of  superintendents  in  many  mills  hundreds  of  miles  away  in 
all  directions."  - 

(3)  The  trust,  being  a  monopoly,  is  less  likely,  we  are  told,  to 

1  When  the  plants  of  the  trusts  are  concentrated  in  one  town  or  region,  no 
disadvantage  is  encountered  on  this  score. 

2  See  Dewing,  Corporate  Promotions  and  Reorganizations,  p.  559. 


ECONOMIES  OF  THE  TRUST  53S 

apply  new  inventions  or  to  adopt  improvements  that  necessitate 
the  scrapping  of  expensive  plant  and  equipment.^  As  Professor 
Clark  puts  it,  "a  monopoly  makes  no  proper  use  of  that  inval- 
uable agent  of  progress,  the  junk  heap."  ^  During  the  period 
that  preceded  the  trust  movement  American  manufacturers  were 
notable  for  their  willingness  to  discard  even  good  machinery  and 
equipment  in  order  to  install  improved  facilities  that  promised  to 
reduce  the  costs  of  production.  It  was  this  policy  that  made  the 
Carnegie  steel  properties  the  most  efficient  in  the  country — so 
efficient  that  Mr.  Carnegie  could  snap  his  fingers  at  the  various 
steel  trusts,  notwithstanding  their  reputed  economies.  His  view 
as  to  the  strong  position  of  his  company  he  expressed  in  a  letter 
to  his  associates,  dated  July  11,  1900.  "We  need,"  he  said,  "to 
manufacture  hoops,  cotton  ties,  steel  ware,  nails,  tubes,  perhaps 
other  things  later  as  we  go  on.  Whenever  we  do  so  we  have  the 
big  trusts  at  our  mercy."  ^  With  the  development  of  an  estab- 
lished monopoly,  however,  a  slackening  in  the  march  of  improve- 
ment may  perhaps  be  expected.  Whereas  competition  provides 
a  stimulus  to  the  introduction  of  improved  methods,  the  ten- 
dency of  monopoly  is  toward  stagnation.  To  be  protected 
against  competition,  said  John  Stuart  Mill,  is  to  be  protected  in 
mental  dullness;  ^  and  certainly  there  is  much  e\idence  to  support 
this  view.  It  is  significant  that  leading  railroad  executives 
opposed  the  proposition  to  estabUsh  regional  railroad  monopo- 
lies, their  contention  being  that  it  was  essential  that  competition 
in  ser\'ice  be  maintained.  The  chairman  of  the  Westinghouse 
Air  Brake  Company  opposed  it  on  the  ground  that  it  would 
retard  invention.  In  a  statement  prepared  for  the  Senate 
Committee  on  Interstate  Commerce  he  said,  "As  a  rule,  railway 
managers  were  not  over-enthusiastic  about  testing  untried 
devices,  and  it  became  necessary  to  find  the  right  man  and  auspi- 
cious conditions,  in  order  that  the  desired  development  and 

1  See  also  p.  511. 

2  Clark  and  Clark,  The  Control  of  Trusts,  p.  14. 

'  Brief  for  the  United  States  in  United  States  v.  United  States  Steel  Corpo- 
ration (no.  481),  vol.  II,  p.  473. 

*  Principles  of  Political  Economy  (7th  edition),  Book  IV,  chapter  VII,  §  57. 


536        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

demonstration  might  be  made.  This  process  was  greatly  facili- 
tated by  the  number  of  railways  to  which  appeals  could  be 
made."  ^  If  it  be  urged  that  trusts  have  continued  to  make 
improvements,  even  of  a  far-reaching  character,  it  may  be 
pointed  out  that,  except  when  they  have  been  protected  by 
patents  or  control  of  natural  resources,  they  have  experienced 
unexpected  difficulty  in  maintaining  their  position,  so  persistent 
is  the  force  of  competition.  Moreover,  they  have  had  to  justify 
their  existence  before  an  aroused  and  hostile  public  opinion.  It 
may  be,  therefore,  that  they  have  not  as  yet  fully  exhibited  their 
natural  tendencies.  However,  once  monopoly  became  secure,  its 
usual  consequences  might  be  expected  to  appear.^  This,  indeed, 
would  doubtless  be  the  outcome  even  though  the  trust  were 
blessed  with  capable  executives;  for  the  financiers  and  capitalists 
that  owned  the  properties  would  oppose  the  introduction  of 
improved  machines  unless  the  resulting  saving  were  sufficiently 
great  to  compensate  for  the  loss  occasioned  by  the  scrapping  of 
the  old  machines.  An  individual  enterprise,  to  be  sure,  must 
sustain  this  same  loss,  yet  it  is  able  to  reimburse  itself  through 
the  increased  business  that  its  lower  cost  of  production  enables  it 
to  secure.  It  may  be  conceded,  as  stated  elsewhere,^  that  the 
introduction  of  a  particular  invention  or  improvement  may  occa- 
sion a  social  loss,  yet  the  possibility  of  an  occasional  loss  in  this 
way  does  not  justify  the  adoption  of  measures  designed  to  inter- 
fere with  the  progress  of  invention  or  the  adoption  of  improve- 
ments. 

(4)  The  trust  is  subject  to  some  financial  outlays  that  individ- 
ual' enterprises  or  combinations  either  do  not  have  at  all  or 
have  in  lesser  volume.  First,  the  trust,  owning  a  number  of 
plants,  often  widely  scattered,  all  of  which  are  managed  by 
salaried  employees,  must  maintain  an  elaborate  and  expensive 
system  of  control  and  supervision.     It  must  make  unusually 

^Hearings  on  Extension  of  Tenure  of  Government  Control  of  Railroads, 
65th  Cong.,  3rd  Scss.,  vol.  I,  p.  1442. 

-  President  Wilson,  in  fact,  maintains  that  they  have  already  appeared. 
See  New  Freedom,  pp.  265-70. 

2  See  p.  513. 


ECONOMIES  OF  THE  TRUST  537 

heavy  outlays  in  the  way  of  bookkeeping,  accounting,  and 
auditing,  and  all  the  paraphernalia  of  administration  designed  to 
stimulate  energy  and  economy  on  the  part  of  its  employees. 
Through  these  expenses  the  problem  of  administration  may  be 
solved,  yet  without  them  effective  administration  is  impossible. 
The  combination,  and  even  the  individual  enterprise,  is  not  free 
from  these  expenses,  to  be  sure,  yet  their  amount  increases  with 
combination,  and  is  the  greater  the  more  far-reaching  the 
combination. 

Second,  some  trusts,  though  not  all,  are  burdened  with  a  nimi- 
ber  of  antiquated,  inefficient,  and  badly  located  plants  that  were 
bought  to  stave  ofif  competition,  actual  or  potential.  In  so  far 
as  these  properties  were  paid  for  in  stock  the  cost  of  production 
is  not  increased;  the  effect  is  merely  to  reduce  the  rate  of  profit  on 
the  company's  stock.  In  so  far  as  they  were  purchased  for  cash 
or  for  issues  of  bonds  they  constitute  a  permanent  drain  on  the 
revenues  of  the  trust.  Moreover,  a  mmiber  of  other  payments 
than  those  involved  in  the  purchase  of  plants  were  often  incurred, 
including  the  rent  of  factories  to  prevent  them  from  operating, 
and  the  payment  of  salaries  to  former  owners  to  keep  them  from 
building  a  new  plant  with  which  to  compete  with  the  trust.  Such 
outlays  deserve  mention,  though  their  importance  must  not  be 
exaggerated. 

Third,  a  considerable  number  of  trusts  have  been  enabled  to 
maintain  their  monopoly  only  through  the  continual  purchase  of 
their  most  effective  competitors.  Trusts  that  have  been  notable 
in  this  regard  are  the  sugar,  tobacco,  gunpowder,  glucose,  and 
starch  trusts,  and  to  a  lesser  degree  the  steel  trust.  Sometimes  a 
high  price  has  been  paid  to  induce  the  independent  concern  to 
sell;  at  other  times  a  severe  competitive  campaign  has  put  the 
competitor  in  such  a  frame  of  mind  that  he  has  been  willing  to 
sell  for  a  moderate  or  even  low  price.  In  either  event  the  trust 
to  maintain  its  monopolistic  position  has  been  put  to  additional 
expense. 

(5)  All  large  businesses,  and  therefore  the  trust  in  particular, 
are  likely  to  suffer  from  the  burden  of  centraKzed  administrative 
machinery.    The  trust  ordinarily  possesses  a  nimiber  of  plants 


538       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

scattered  throughout  the  country,  and  does  a  nation-wide  busi- 
ness. Obviously  an  enterprise  of  such  magnitude  and  dispersion 
can  not  receive  the  personal  and  close  supervision  of  the  execu- 
tive. It  is  therefore  necessary  to  establish  a  group  of  depart- 
ments and  subdepartments,  and  to  institute  an  elaborate  system 
of  records  and  reports  for  the  purpose  of  checking  up  the  work  of 
the  separate  plants  and  departments.  From  the  point  of  view  of 
the  trust  there  is  grave  danger  lest  this  "  system"  prove  cumber- 
some and  burdensome;  lest  it  degenerate  into  bureaucracy  and 
routine,  into  what  in  government  departments  is  slightingly 
referred  to  as  " red  tape."  An  aversion  to  change  is  a  well-known 
characteristic  of  all  large  administrations;  and  this  is  likely  to  be 
particularly  true  of  a  trust,  the  very  economies  of  which  are  in 
the  main  those  of  systematization  and  standardization.  On  the 
other  hand,  there  is  the  ever  present  possibiUty  that  the  necessity 
of  referring  proposals  for  improvements  and  changes  to  the 
"higher  ups"  may  deaden  the  enthusiasm  and  initiative  of  the 
subordinate  officials.  Thus  there  may  arise,  as  Professor  Bullock 
has  well  said,  "an  irrepressible  conflict  between  that  central 
responsibility  necessary  for  intelligent,  unified  management  and 
that  individual  freedom  and  energy  requisite  for  the  healthful 
hfe  of  the  separate  members."  What  is  gained  at  the  center  in 
the  way  of  control  and  guidance  may  thus  be  lost  through  re- 
duced efl&ciency  and  energy  at  the  circumference.  These  inher- 
ent disadvantages  of  large-scale  operations  apply,  of  course,  also 
to  individual  enterprises  and  to  combinations,  yet  the  trust  is 
particularly  subject  to  them  because  of  its  size,  the  distribution 
of  its  business  over  a  wide  area,  and  most  of  all  because  the 
tighter  the  monopoly  the  less  it  feels  the  competitive  spur. 

The  doubt  that  has  been  expressed  as  to  the  superior  efficiency 
of  the  trust  form  of  organization  is  increased  upon  an  examina- 
tion of  the  record  of  trusts.  In  view  of  the  fact  that  most  of  the 
modern  trusts  were  organized  at  least  twenty  years  ago,  sufficient 
time  has  elapsed  to  gain  some  insight  into  what  is  to  be  the  ver- 
dict of  history  upon  their  future.  During  this  period  a  large 
number  of  trusts  have  done  so  poorly  that  they  must  be  regarded 


ECONOMIES  OF  THE  TRUST  539 

as  failures.  Among  these  trusts  are  the  following  (in  alphabeti- 
cal order):  asphalt,  bicycle,  cordage,  cotton  duck,  cotton  yam, 
glucose,  linseed  oil,  malt,  news  print  paper,'  paper  bag,  salt, 
shears  and  scissors,  silver-ware,  sole  leather,  starch,  upper 
leather,  wall  paper,^  whisky,  and  writing  paper.  The  list  is  not 
complete,  yet  it  is  sufficiently  long  to  show  that  the  economies 
of  the  trust  form  of  organization  have  often  proved  illusory,  or, 
if  not  illusorj',  they  have  not  been  sufficiently  important  to  ofifset 
the  disadvantages  peculiar  to  that  form  or  organization.  There 
are  other  trusts  that  may  have  been  financially  successful  yet 
have  not  succeeded  in  retaining  a  monopoHstic  grasp  on  the  in- 
dustry. The  sugar  and  tin  can  trusts  will  serve  as  examples. 
The  steel  trust  has  shown  a  decUning  percentage  of  the  country's 
output,  yet  on  the  whole  seems  to  have  the  situation  well  in  hand 
through  a  policy  of  cooperation  with  its  more  rapidly  growing 
semi-competitors. 

Does  the  fact  that  a  number  of  trusts  have  not  been  failures, 
nay  quite  successful,  prove  the  economies  of  the  trust  form  of 
organization?  It  would  not  appear  so.  In  an  examination  of 
a  considerable  number  of  individual  trusts  we  have  yet  to  find 
one  the  success  of  which  is  not  expHcable  upon  other  grounds. 
Some  trusts,  notably  the  shoe  machinery,  the  camera  (and  at  one 
time  the  aluminum,  gunpowder,  and  sulphur  trusts)  are  founded 
on  a  grant  of  monopoly  by  the  national  government.  Others, 
e.  g.,  the  aluminum,  borax,  diamond  (an  international  trust), 
and  chewing  gum  trusts,  are  (or  have  been)  fundamentally 
based  on  the  control  of  a  natural  resource.  The  steel  trust  might 
once  have  been  placed  in  this  group,  but  technical  improvements 
that  have  permitted  the  economical  utilization  of  lower  grade 
ores  than  those  that  had  been  substantially  monopolized  by  the 

^  The  International  Paper  Company  no  longer  has  even  the  largest  mill  in 
the  countr>^,  the  largest  mill  being  owned  by  the  Great  Northern  Paper 
Company.  Pulp  and  Paper  Investigation  Hearings,  House  Doc.  no.  1502, 
60th  Cong.,  2nd  sess.,  1908-1909,  p.  1072. 

2 The  head  of  this  trust  said:  "It  has  .  .  .  been  demonstrated  that  the 
manufacture  of  wall  paper  involves  elements  of  so  peculiar  a  nature  that  it 
cannot  be  as  successfully  conducted  through  the  medium  of  a  combination  as 
it  can  through  independent  and  isolated  plants."    Chron.,  71,  p.  33  (1900). 


540       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Steel  Corporation  have  taken  away  much  of  the  advantage  that 
the  Corporation  formerly  enjoyed  in  this  regard.  The  success 
of  the  working  agreement  in  the  anthracite  coal  industry  is 
also  based  on  the  concentrated  ownership  of  a  limited  natural 
resource.  Other  trusts  have  been  the  recipients  of  transportation 
favors,  notably  the  oil  trust  and  the  sugar  trust. ^  Still  others, 
having  once  secured  a  monopolistic  position  by  the  act  of  com- 
bination, have  maintained  this  position:  (i)  by  the  resort  to 
unfair  competitive  tactics  (e.  g.,  the  oil,  gunpowder,  tobacco, 
cash  register,  and  sugar  trusts);^  or  (2)  by  the  purchase  of  the 
leading  competitors  (e.  g.,  the  tobacco,  sugar,  gunpowder,  and 
in  lesser  degree  the  steel  trusts);  or  (3)  by  virtue  of  the  fact  that 
the  most  efficient  concerns  were  a  part  of  the  trust  (e.  g.,  the 
harvester,  steel,  and  tobacco  trusts).  The  harvester  trust,  the 
Bureau  of  Corporations  found,  had  a  lower  cost  of  production 
than  its  competitors,  yet  this  advantage  appears  to  have  re- 
sulted mainly  from  the  fact  that  it  included  the  McCormick 
and  Deering  concerns,  easily  the  two  largest  manufacturers  of 
harvesters  in  the  country  prior  to  the  organization  of  the  trust. 
No  satisfactory  evidence  has  been  adduced  to  show  that  the 
cost  of  manufacturing  harvesters  at  the  plants  of  these  two 
companies  has  been  reduced  as  the  result  of  the  organization  of 
the  trust;  in  fact,  it  is  probable  that  manufacturing  (not  selling) 
costs  at  the  McCormick  plant,  at  least,  have  been  increased, 
for  the  output  of  binders  and  mowers  at  this  plant  since  the 
formation  of  the  trust  has  never  equalled,  and  is  now  much  less 
than,  the  maximum  output  in  the  period  preceding  the  organ- 
ization of  the  trust.^  Again,  a  large  part  of  such  advantage,  if 
any,  as  the  steel  trust  now  enjoys  unquestionably  results  from 
the  inclusion  of  the  Carnegie  works, — admittedly  the  most  ef- 
ficient steel  plant  in  the  country  at  the  time  of  its  acquisition. 
The  Corn  Products  Refining  Company  owes  much  of  its  suc- 
cess of  recent  date  to  the  fact  that  it  took  in  the  New  York 

1  The  steel  trust  has  not  enjoyed  railroad  rebates,  yet  it  has  occupied  a 
strategic  position  through  its  ownership  of  iron  ore  railroads. 
^  For  details  see  Stevens,  Unfair  Competition,  191 7. 
» Cf.  p.  250. 


ECONOMIES  OF  THE  TRUST  541 

Glucose  Company,  then  owning  the  most  economical  refinery 
in  the  country.  Until  this  company,  managed  by  men  trained 
in  the  Standard  Oil  organization,  was  brought  in,  the  glucose 
trust  was  highly  unsuccessful;  and  even  after  it  was  absorbed,  the 
trust,  notwithstanding  the  fact  that  it  built  at  Argo,  lUinois, 
what  is  now  the  largest  and  best  glucose  and  starch  factory  in 
the  world,  saw  its  control  of  the  industry  steadily  slip  away. 

Concluding  as  to  the  economies  of  the  trust  form  of  organi- 
zation, though  one  would  like  more  facts  before  reaching  a  final 
conclusion  on  this  perplexing  matter,  it  must  be  admitted  that 
the  showing  of  the  trusts  has  not  realized  the  high  hopes  that 
were  entertained  for  them  upon  their  formation  about  a  gener- 
ation ago. 


CHAPTER  XX 
REGULATION  OF  PRICES  ^ 

In  view  of  the  disappointing  performance  of  the  trusts,  and 
in  view  of  the  comparative  lack  of  success  attending  the  at- 
tempts to  dissolve  them,  it  becomes  pertinent  to  consider  the 
suggestion  that,  whenever  monopolies  have  been  established 
in  industry,  the  government  regulate,  through  an  administra- 
tive commission,  the  prices  that  may  be  charged  or  the  profits 
that  may  be  realized  in  the  monopolized  industry. 

The  difiiculties  that  inhere  in  price  regulation  are  impressive, 
as  will  shortly  appear. 

The  purpose  of  governmental  price  regulation  would  be  to 
establish  a  fair  price.  Since  a  fundamental  evil  of  monopoly, 
if  not  the  fundamental  evil,  is  the  charging  of  excessive  prices, 
it  would  be  incumbent  upon  the  government,  through  some 
commission  of  the  nature  of  the  Interstate  Commerce  Commis- 
sion or  the  Federal  Trade  Commission,  to  fix  a  fair  price.  Opin- 
ions will  differ  as  to  what  constitutes  a  "fair  price,"  but  a  fair 
price  may  perhaps  be  rightly  characterized  as  one  that  is  suffi- 
ciently remunerative  to  attract  the  additional  investments  of 
capital  that  recurrently  become  necessary.  Stated  somewhat 
differently  a  fair  price  is  one  that  will  ensure  the  desired  out- 
put of  a  particular  commodity.  These  two  statements  may 
readily  be  harmonized,  notwithstanding  the  fact  that  in  one  sen- 
tence there  is  used  the  word  necessary  and  in  the  other  the  word 
desired,  by  regarding  an  investment  of  capital  as  necessary  if  it 

1  On  price  regulation  in  general  and  in  war  time  in  particular  see:  Taussig, 
Quarterly  Journal  of  Economics,  33,  pp.  205-241;  the  series  of  articles  on 
price  control  during  the  war  that  have  appeared  in  this  Journal  since  August, 
1918;  Haney,  Political  Science  Quarterly,  34,  pp.  104-126,  262-289,  434-453; 
and  the  Price  Bulletins  of  the  War  Industries  Board,  particularly  Bulletin 
no.  3  (Government  Control  over  Prices). 

542 


REGULATION  OF  PRICES  543 

is  required  to  produce  the  output  that  is  desired.  The  implica- 
cation  is,  of  course,  that  only  that  output  may  be  regarded  as 
desired  for  which  there  is  an  effective  demand,  for  which,  in  our 
economic  phraseology,  there  is  desire  coupled  with  purchasing 
power.  In  a  nutshell,  the  proposition  is,  that  a  price  is  fair  if  it 
coincides  with  the  long  run  price  that  would  obtain  under  con- 
ditions of  effective  competition,  assuming,  of  course,  that  com- 
petition is  not  "ruinous,"  and  assuming  that  the  trust  makes 
neither  for  efficiency  nor  for  inefficiency.  If  competition  is  ruin- 
ous, the  governmentally  fixed  price  would  properly  be  higher 
than  the  price  that  would  obtain  under  competitive  conditions, 
and  it  would  be  lower  than  this  competitive  price,  if  the  trust 
makes  for  efficiency.  If  the  trust  is  not  as  efficient  as  less  in- 
clusive business  units,  the  price  under  a  scheme  of  trust  regu- 
lation would  probably  exceed  a  competitive  price;  but  of  course 
regulation  of  prices  under  these  circumstances  would  hardly 
represent  a  permanent  policy,  since  the  inefficiency  of  the  trust 
would  eventually  lead  to  its  disintegration.^ 

Having  reached  a  decision  as  to  what  constitutes  a  fair  price, 
the  next  step  of  the  price-fixing  agency  would  be  to  determine 
the  fair  price  for  each  of  the  monopolized  commodities.  How 
would  it  proceed?  An  obvious  method  of  approach — the  method 
generally  employed  during  the  war,  and  the  method  most  likely 
to  be  employed  in  the  regulation  of  trusts — would  be  to  ascertain 
the  cost  of  production  exclusive  of  profit,  and  then  to  add  to  the 
cost  a  fair  profit  based  on  the  investment.  To  state  the  matter 
concretely,  a  price  of  $1.00  per  unit  may  be  regarded  as  fair,  if  at 
that  price  500,000  units  can  be  sold,  if  the  cost  of  producing  these 
units  amounts  to  $400,000,  and  if  the  fair  return  on  the  invest- 
ment amounts  to  $100,000  (say  10  per  cent  on  $1,000,000).^    It 

1  But  cf.  p.  561. 

2  This  substantially  corresponds  to  the  principle  accepted  by  the  Supreme 
Court  that  a  reasonable  rate  for  a  public  service  corporation  is  one  that  yields 
a  fair  return  on  the  fair  value  of  the  property  employed  in  the  public  service 
(see  Smyth  v.  Ames,  169  U.  S.  466).  In  both  instances  the  charge  (rate  or 
price)  is  fair  when  the  excess  of  receipts  over  costs  equals  a  fair  return  on  the 
value  of  the  property  or  the  investment,  as  the  case  may  be. 


544       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

has  been  said  that  the  price  must  include  a  fair  return  on  the 
"investment."  This  expression,  Hke  the  Supreme  Court's 
"fair  value  of  the  property,"  is  open  to  several  interpretations. 
Both  terms,  for  example,  may  represent  either  the  actual  cost  of 
the  property  or  else  the  sum  required  to  reproduce  it  at  the 
present  time, — the  term  "investment"  was  used  in  the  latter 
sense  by  a  federal  court  in  fixing  the  price  of  news  print  paper. 
It  is  not  proposed,  therefore,  to  define  the  term  investment  nor 
to  indicate  how  it  is  to  be  determined, — that  is  a  problem  that 
may  be  left  to  the  government  price-fixing  agencies  and  to  the 
courts, — but  merely  to  point  out  that  a  fair  price  must  cover  not 
only  operating  costs,  but  also  a  return  on  the  "  investment"  (or 
the  fair  value  of  the  property).^  Likewise  the  fair  rate  of  profit 
on  the  investment  (or  value  of  the  property)  is  also  a  matter  for 
determination  by  the  appropriate  agency.  Bearing  in  mind  the 
concept  of  fair  price,  the  rate  of  profit  should  be  fixed  high 
enough  in  each  industry  to  attract  the  requisite  capital,  but  it 
should  be  no  higher  than  this, — otherwise  injustice  would  be 
done  the  consumers.  The  rate  would  vary,  of  course,  in  the 
different  industries;  the  figure  of  lo  per  cent  has  been  here 
employed  merely  by  way  of  illustration. 

The  solution  of  the  problem  of  the  fair  price  thus  calls  for  a 
determination  of  the  cost  of  production,  the  amount  of  the 
investment,  and  the  fair  rate  of  return.  Let  us  first  consider  the 
situation  as  to  costs,  making  as  we  proceed  certain  comments  on 
price-making  as  based  on  costs  of  production. 

The  ascertainment  of  the  cost  would  be  less  difficult  in  those 
cases  in  which  a  given  commodity  is  produced  under  conditions 
of  uniform  cost,  uniform,  that  is,  to  all  producers.  Yet  even  here 
there  would  be  abundant  occasion  for  controversy  over  many 
items,  such  as,  for  example,  the  proper  allowance  for  depreciation 
and  obsolescence,  and  the  proper  distribution  of  overhead  ex- 
penses. The  matter  would  be  simplified  indeed  were  it  possible 
to  require,  as  with  the  railroads,  that  all  the  concerns  to  be 

1  Without  assuming  that  the  investment  is  identical  with  the  fair  value  of 
the  property,  the  terms  will  be  used  interchangeably  for  the  purpose  of 
facilitating  comparisons  between  industrial  and  public  service  corporations. 


REGULATION  OF  PRICES  545 

regulated  install  a  uniform  accounting  system,  yet  this  is  hardly 
feasible  for  industrial  companies  because  of  the  varying  condi- 
tions in  the  different  industries. 

In  fact,  however,  the  cost  of  production  for  a  given  commodity 
is  rarely  the  same  for  all  producers;  in  the  production  of  nearly 
every  commodity  there  is  a  wide  range  between  the  costs  of  the 
most  efficient  or  best  located  producers  and  the  costs  of  the 
inefficient  or  poorly  located  producers.^  This  is  less  true,  of 
course,  when  the  trust  produces  nearly  all  of  the  output,  yet 
there  is  practically  no  trust  that  does  not  have  some  competitors, 
since  complete  industrial  monopoly  can  hardly  be  said  to  exist  in 
this  country. 

Under  these  circumstances  there  would  appear  to  be  only  two 
alternatives  open  to  the  price-fixing  body.  Either  each  producer 
must  be  limited  to  a  price  that  covers  his  cost  of  production  plus 
a  reasonable  profit;  or  the  price  must  be  the  same  for  all  pro- 
ducers (either  in  the  whole  country  or  in  a  given  district) ,  yet  so 
adjusted  as  to  remunerate  sufficiently  those  high  cost  producers 
whose  output  is  required  to  satisfy  the  demand.  The  objections 
to  the  first  arrangement  are  fundamental.  First,  and  foremost, 
this  plan  is  economically  unsound,  since  it  removes  the  incentive 
to  efficient  production.  If  the  low  cost  producer  is  to  be  allowed 
his  cost  plus  a  reasonable  profit,  why  should  he  take  any  particu- 
lar pains  to  reduce  his  expenses?  Indeed,  if  the  profit  is  not  a 
lump  sum,  but  a  percentage  addition  to  the  cost — as  distin- 
guished from  a  percentage  based  on  the  capital  investment — 
there  is  an  incentive  to  run  up  the  costs,  since  the  higher  they 
are  the  greater  the  allowance  for  profit.  That  such  is  the  practi- 
cal result  of  a  cost  plus  arrangement  was  demonstrated  con- 
vincingly during  the  war,  notably  in  the  shipbuilding  industry. 
Second,  this  plan  would  require  an  accurate  determination  of  the 
cost  of  each  individual  producer,  and  it  would  thus  call  for  a  very 
large  staff  of  government  accountants  and  investigators.  It 
would  lead,  moreover,  to  perpetual  bickering  and  wrangling;  for 
the  exact  costs  are  not  ascertainable,  and  as  a  result  there  would 
be  charges  of  discrimination  as  between  various  producers. 
1  Cf.  War  Industries  Board  Price  Bulletin  no.  3,  pp.  383-384. 


546        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

Under  the  second  plan  the  price  would  be  fixed  for  the  industry 
as  a  whole  in  such  a  manner  as  to  take  care  of  the  marginal 
producer.  The  idea  would  be  to  determine  the  desired  output, 
and  to  set  the  price  at  a  sufficiently  high  level  to  attract  this 
output.  During  the  war  the  carrying  out  of  this  policy  offered 
comparatively  Httle  difficulty,  and  engendered  no  considerable 
opposition  on  the  part  of  the  producers.  This  was  because  the 
needs  of  the  government  were  so  pressing  that  there  was  a  de- 
mand for  practically  all  that  the  producers  of  essential  articles 
could  manufacture,  and  therefore  comparatively  few  producers 
were  eliminated  from  the  field.  In  peace  times,  however,  there 
might  be  considerable  opposition  to  governmental  determination 
of  the  quantity  of  a  given  commodity  that  should  be  produced; 
for  this  is  what  the  matter  in  the  last  analysis  comes  to.  If  the 
price  were  made  high  enough  to  take  care  of  the  highest  cost 
producers — the  extramarginal  producers — there  would  be  grave 
dissatisfaction  on  the  part  of  the  consumers;  ^  if  the  price  were 
put  so  low  as  to  squeeze  out  the  extramarginal  producers  there 
would  be  complaint  from  them,  and  from  the  consuming  public 
in  the  event  that  the  output  did  not  meet  its  needs.  To  place  the 
government,  therefore,  in  the  position  of  dictating  the  quantity 
of  sugar,  gasoline,  or  cigarettes  that  shall  be  produced  is  obvi- 
ously to  burden  it  with  an  ungracious  task.  During  the  war  it 
was  forced  to  accept  this  burden,  because  the  forces  that  nor- 
mally bring  about  the  ready  adjustment  of  supply  to  demand 
failed  to  function  satisfactorily.  Yet  even  in  peace  times  it  may 
be  compelled  to  assume  the  task,  ungracious  though  it  be,  if  the 
supply  comes  under  the  control  of  a  monopoly,  and  prices  cease 
to  be  determined  by  competitive  factors. 

The  second  plan  is  not  open  to  the  objections  advanced 

1  If  the  price  set  were  only  a  maximum  price  it  is  possible  that  the  intramar- 
ginal  producers  would  reduce  the  price  to  shut  out  the  extramarginal  produc- 
ers, in  which  case  there  would  be  no  occasion  for  dissatisfaction  on  the  part 
of  the  consuming  public.  But  it  is  also  possible  that  the  intramarginal 
producers  would  find  the  sale  of  a  reduced  quantity  of  goods  at  a  high  price 
more  profitable  than  the  sale  of  a  larger  quantity  at  a  lower  price,  and  in 
this  case  the  extramarginal  producers  would  be  permitted  to  continue  in 
existence,  and  the  consumers  would  have  legitimate  ground  for  complaint. 


REGULATION  OF  PRICES  547 

against  the  first.  Unlike  the  first,  it  would  not  discourage  eflS- 
cient  operation,  since  the  benefits  of  economical  production 
would  go,  as  they  should,  to  the  concerns  achieving  these  econo- 
mies, and  since  the  marginal  producer  (the  bulk  fine  producer,  as 
he  was  often  called  during  the  war),  if  decHning  in  efiiciency, 
would  face  the  prospect  of  being  squeezed  out  either  by  an 
intramarginal  producer  or  by  an  extramarginal  producer.  And, 
second,  it  would  throw  less  of  a  burden  on  the  government' 
agencies,  since  it  would  not  be  necessary  to  know  the  exact  costs 
of  every  producer;  it  would  suffice  to  know  the  exact  costs  of 
those  producers  located  near  the  margin  of  production.  As 
between  the  two  schemes,  therefore,  the  second  would  almost 
certainly  be  the  one  actually  adopted. 

A  perplexing  problem  in  price-fixing  is  how  to  proceed  in  the 
case  of  articles  produced  under  conditions  of  joint  cost.  The 
orthodox  doctrine  is  that  the  prices  of  articles  produced  at  joint 
cost  tend  to  equal  their  combined  costs  of  production;  ^  and 
that  the  apportionment  of  the  total  price  between  the  joint 
products  is  determined  by  the  relative  intensity  of  the  demand. 
There  is  no  tendency  for  these  articles  to  sell  for  their  individual 
costs,  since  their  individual  costs  are  not  ascertainable.  In 
such  a  situation  how  shall  the  price-fixing  body  proceed?  To 
give  an  example,  the  Standard  Oil  Company  prior  to  its  disso- 
lution secured  from  crude  petroleum  over  one  hundred  differ- 
ent products.  Under  such  circumstances  should  control  be  ex- 
erted over  all  of  the  products  of  crude  petroleum,  or  only  over 
those  particular  products  monopolized  by  the  trusts?  If  the 
former  policy  be  adopted  with  respect  to  all  trusts,  it  will  be 
necessary  for  the  government  to  fix  the  prices  of  hundreds  of 
products,  thus  adding  greatly  to  the  difiiculties  of  a  task  already 
imposing.  If,  on  the  other  hand,  the  latter  pohcy  be  adopted, 
how  determine  the  cost  of  producing  such  articles  as  are  actually 
monopolized,  say,  illustrating  again  by  the  petroleum  industry, 
the  cost  of  producmg  gasoline  or  kerosene?  The  cost  of  pro- 
duction being  joint,  the  cost  of  any  one  product  can  not  be  de- 
termined in  a  satisfactory  manner.  The  cost  of  producing  gas- 
^  Including  in  costs,  however,  a  normal  profit. 


548        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

oline  or  kerosene  might  indeed  be  regarded  as  the  total  costs 
minus  the  prices  received  for  the  by-products,  yet  this  would 
frequently  lead  to  absurd  conclusions.  If,  for  example,  the  by- 
products could  be  disposed  of  on  highly  favorable  terms,  it 
might  well  happen  that  the  cost  of  producing  gasoline  as  thus 
calculated  would  be  nil.  Clearly  the  cost  of  producing  any  joint 
product  would  be  understated,  if  it  were  arrived  at  through  the 
subtraction  from  the  total  costs  of  the  prices  received  for  the 
other  joint  products,  since  these  prices  presumably  include  prof- 
its as  well  as  costs.  There  is  thus  no  escape  from  the  conclu- 
sion that  the  cost  of  producing  a  joint  product  is  not  ascertain- 
able by  any  scientific  and  nonarbitrary  basis  of  calculation. 
The  best  that  the  price-fixing  agency  could  hope  to  do,  there- 
fore, would  be  to  arrive  at  a  reasonable  approximation  to  such 
cost.  However,  a  price  fixed  with  reference  to  costs  that  are 
only  reasonably  accurate  might  still  be  a  nearer  approach  to  a 
fair  price  than  w^ould  be  the  price  that  had  formerly  been  charged 
by  the  trust,  and  in  this  case  regulation  would  have  justified 
itself.  Certainly  joint  cost  presents  no  more  of  a  problem  in 
the  case  of  manufacturing  businesses  than  it  does  in  the  case  of 
railways;  and  there  are  many  who  think  that  the  rates  of  the 
latter  have  been  regulated  with  some  measure  of  success. 
Moreover,  the  difficulty  that  arises  through  the  presence  of 
joint  cost  is  by  no  means  a  universal  one  in  industry;  many 
trusts,  the  sugar  and  tin  can  trusts,  for  example,  produce  al- 
most entirely  a  single  commodity,  and  the  ascertainment  of 
their  costs  of  production  thus  presents  no  peculiar  difficulties. 
After  the  costs  had  once  been  determined,  more  or  less  satis- 
factorily, it  would  soon  be  necessary  to  redetermine  them. 
Conditions  in  industry  are  continually  changing.  There  is  no 
known  process  for  controlling  the  wants  of  the  people;  and  as  a 
result  the  demand  for  particular  products  changes  from  month 
to  month,  from  week  to  week,  and  even  from  day  to  day.  Since 
the  costs  of  production  (except  under  conditions  of  constant  or 
uniform  costs)  vary  with  the  volume  of  output,  an  increase  in 
the  demand  for  a  given  article  will  cause  its  cost  of  production 
to  increase  or  decrease  according  as  the  industry  is  character- 


REGULATION  OF  PRICES  '     549 

ized  by  increasing  or  decreasing  costs.      The  same  will  be  true 
if  there  takes  place  any  change  in  the  prices  of  materials  and 
supphes,  or  in  the  wages  of  labor.      Moreover,  business  runs  in 
cycles  of  good  years  and  bad  years,  and  thus  there  are  pro- 
nounced changes  in  industrial  conditions  from  tinie  to  tune.    To 
meet  this  situation  with  even  a  modicvmi  of  success  it  would  be 
necessary  for  the  government  to  keep  in  close  touch  at  all  times 
^\'ith  the  costs  of  producing  the  articles  under  its  control;  it  would 
not  suffice  for  it  to  make  spasmodic  investigations,  since  by  the 
time  it  had  completed  its  investigations  the  costs  may  have 
changed  once  more,  and  meanwhile  grave  injustice  would  have 
been  done.    Is  it  to  be  anticipated  that  the  actions  of  a  govern- 
mental investigating  body,  animated  by  a  desire  to  establish  a 
fair  price,  would  be  characterized  by  that  promptness  demanded 
in  the  situation?    Were  the  government  to  fix  the  price  of  ever^'- 
thing  these  objections  based  on  changing  conditions  would  largely 
disappear.     But  industry  would  then  be  stereotyped  as  well  as 
stabilized;  and  the  remedy  would  prove  worse  than  the  disease. 
A  \ital  question  is  whether  the  decision  of  the  price-fixing 
body  as  to  costs,  and  as  to  prices  based  on  these  costs,  would  be 
final  or  would  be  reviewed  by  the  courts.    If  the  former,  pro- 
ducers would  be  denied  the  privdlege  enjoyed  by  pubHc  service 
corporations  of  ha\dng  a  judicial  detemiination  of  the  question 
whether  the  estabHshment  of  a  price  (or  rate)  amounts  to  a 
confiscation  of  their  property.     As  matters  now  stand,  a  pro- 
ducer who  can  not  dispose  of  his  product  at  a  profit  because 
the  price  is  below  his  cost  has  no  legal  case;  but  what  would  be 
his  situation  if  his  inability  to  earn  a  fair  return  were  due  to  an 
order  or  decision  of  the  price-fixing  agency?    If,  however,  there 
was  to  be  a  judicial  review  of  the  price-making  orders  of  the 
government,  as  almost  certainly  there  would  be,  the  inevitable 
outcome  would  be  delay,  and  conceivably  such  a  consideration 
for  property  interests  as  would  prevent  the  consumers  from  real- 
izing any  notable  gain  through  governmental  price-fixing.    The 
fixing  of  the  price  of  news  print  paper  is  a  case  in  point. ^    As  a 

1  See  Haney,  American  Economic  Review,  9,  pp.  47-56;  and  Merchant, 
Quarterly  Journal  of  Economics,  34,  pp.  313-328. 


550       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

result  of  an  agreement  between  certain  news  print  paper  manu- 
facturers and  the  Attorney  General  of  the  United  States,  the 
Federal  Trade  Commission,  not  possessing  any  war  powers  in 
the  matter,  undertook  to  establish  the  maximum  price  to  be 
charged  for  news  print  paper.  The  Commission  after  an  investi- 
gation extending  over  half  a  year  fixed  the  maximum  price  at 
$3.10  per  100  pounds  f.  o.  b.  mill  in  carload  lots.  Three  months 
later  a  United  States  Circuit  Court  on  appeal  fixed  the 
price  at  $3.50  per  100  pounds,  or  13  per  cent  higher.  It 
would  thus  appear  that  either  the  Commission  was  unfair 
to  the  manufacturers  or  the  courts  inconsiderate  of  the 
public  interests.  Of  course  both  the  Commission  and  the 
courts  fixed  what  they  regarded  as  a  fair  price,  yet  if  they 
can  not  come  any  nearer  to  an  agreement  than  this,  it  must 
be  that  the  problem  of  establishing  a  fair  price  is  a  highly 
perplexing  one. 

The  cost  of  production  having  been  ascertained  as  accurately 
as  may  be,  the  next  problem  would  be  to  determine  the  "fair" 
rate  of  profit,  which  in  conjunction  with  the  amoimt  of  the  in- 
vestment would  fix  the  total  of  the  profits  to  be  allowed.  Un- 
doubtedly, if  experience  with  other  industries  subject  to  price 
and  rate  regulation  is  any  guide,  the  fair  rate  of  profit  and  the  in- 
vestment would  in  the  last  analysis  be  matters  for  judicial  deter- 
mination. Yet  after  grappUng  with  this  subject  for  a  generation 
what  have  the  courts  to  offer  on  this  point?  We  do  not  know 
as  yet  what  the  Supreme  Court  considers  a  fair  return  on 
property  employed  in  the  railroad  business,  a  business  of  much 
greater  stability  than  manufacturing,  and  one  much  less  subject 
to  the  menace  of  new  competition.  The  railroad  industry  is 
recognized  to  be  a  natural  monopoly,  and  the  federal  govern- 
ment, as  well  as  a  number  of  states,  do  not  permit  new  lines  to 
be  constructed  without  the  consent  of  the  appropriate  authori- 
ties. How  much  more  difficult  then  it  would  be  to  determine  the 
fair  rate  of  profit  for  diverse  manufacturing  industries  enjoying 
no  statutory  immunity  from  outside  competition.  It  would  be 
necessary  to  make  allowance  in  each  case  for  the  danger  of  obso- 
lescence, the  hazard  of  the  business,  the  stabiHty  of  the  industry, 


REGULATION  OF  PRICES  551 

the  exhaustion  of  the  capital  (as  in  a  mining  enterprise),  the 
attractiveness  to  investors,  and  the  Hke. 

Even  more  shrouded  in  doubt  is  the  manner  in  which  the  in- 
vestment, or  the  ''fair  value  of  the  property,"  is  to  be  arrived  at. 
The  Supreme  Court  in  Smyth  v.  Ames,  decided  in  1S98,  said: 
"We  hold,  however,  that  the  basis  of  all  calculations  as  to  the 
reasonableness  of  rates  to  be  charged  by  a  corporation  maintain- 
ing a  highway  under  legislative  sanction  must  be  the  fair  value 
of  the  property  being  used  by  it  for  the  convenience  of  the  pub- 
lic. And  in  order  to  ascertain  that  value,  the  original  cost  of 
construction,  the  amount  expended  in  permanent  miprovements, 
the  amount  and  market  value  of  its  bonds  and  stock,  the  pres- 
ent as  compared  with  the  original  cost  of  construction,  the  prob- 
able earning  capacity  of  the  property  under  particular  rates 
prescribed  by  statute,  and  the  sum  required  to  meet  operating 
expenses,  are  all  matters  for  consideration,  and  are  to  be  given 
such  weight  as  may  be  just  and  right  in  each  case. "  ^  As  if  this 
were  not  enough,  it  went  on  to  say  that  there  might  be  still 
other  matters  to  be  regarded  in  estimating  the  value  of  the  prop- 
erty. Accordingly  when  Congress  provided  in  19 13  for  a  valua- 
tion of  the  railroads  in  order  to  ascertain  their  fair  value,  it  re- 
quired the  Interstate  Commerce  Commission  to  determine  the 
value  in  a  variety  of  ways.  Upon  this  task  the  Commission 
has  been  engaged  for  eight  years,  and  the  task  is  not  yet  com- 
pleted. Its  completion,  moreover,  will  be  the  signal  for  a  pro- 
longed controversy  over  methods  and  results.  And  if  the  ascer- 
tainment of  the  fair  value  of  railroad  property  is  beset  with  so 
many  difficulties,  would  not  the  same  prove  true  of  the  determin- 
ation of  the  investment  for  a  considerable  variety  of  industries. 
The  task  may  not  be  so  imposing  perhaps  in  the  case  of  industrial 
enterprises  as  in  the  case  of  railroads,  but  its  satisfactory  com- 
pletion would  require  considerable  time;  and  meanwhile  the 
trusts  would  continue  to  enjoy  monopoly  gains. 

If  it  be  said  that  during  the  war  the  various  price-fixing  agen- 
cies determined  the  fair  profit  with  promptitude,  it  may  be 
pointed  out  that  the  pressing  necessity  of  stimulating  production 

1 169  u.  s.  546-547. 


552       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

insured  the  producers  a  liberal  profit  with  which  they  could  not 
well  be  dissatisfied,  and  that  the  inexpediency  of  criticising 
governmental  agencies  during  war  times  restrained  pubUc 
protest  at  the  hberal  rate  of  profit.  In  those  cases  in  which 
the  rate  of  profit  obtained  by  the  producers  was  actually  meager 
the  same  considerations  prevented  their  objections  from  being 
as  vociferous  as  they  would  be  under  conditions  of  peace.  In 
fact,  however,  the  investment  in  the  property  was  not  determined 
with  exactitude — there  was  not  time  during  the  war  for  exact- 
ness— and  the  allowance  for  profit  was  thus  commonly  made 
upon  a  rough  and  ready  basis  that  offered  no  guarantee  of  jus- 
tice as  between  the  producers  and  the  consumers,  and  that 
would  hardly  be  tolerated  as  a  permanent  condition. 

At  this  point  we  may  digress  to  consider  the  proposal  that 
we  regulate  the  profits  of  trusts,  and  not  the  prices  of  their 
products.  In  view  of  the  manifest  difficulty  in  controlHng  trust 
prices,  can  not  the  tendency  of  the  trust  to  charge  excessive 
prices  be  prevented  from  operating  to  the  public  injury  by  gov- 
ernmental limitation  of  or  taxation  of  its  profits? 

At  first  glance  it  might  appear  as  if  the  regulation  of  profits 
would  be  comparatively  simple, — much  more  so  than  the  deter- 
mination of  a  reasonable  price.  The  capitalization  of  a  company 
being  known,  its  profits  can  be  limited  to  such  a  return  on  that 
capital  as  will  suffice  in  that  industry  to  attract  the  requisite 
supply  of  new  funds.  Yet  there  are  three  serious  defects  in  this 
scheme.  First,  the  capitalization  of  any  particular  company 
bears  no  necessary  relation  to  the  sum  on  which  the  concern  is 
entitled  to  a  fair  return.  Some  companies,  both  industrial 
and  public  service,  have  an  excessive  capitalization,  whether 
on  the  basis  of  original  investment,  cost  of  reproduction,  or 
earning  capacity;  and  for  them  to  be  allowed  a  fair  return  on 
their  excessive  capitalization  would  be  unjust  to  the  public, 
and  to  the  other  companies  in  this  industry  that  had  not  over- 
capitalized their  business.  The  only  equitable  arrangement, 
therefore,  would  be  to  permit  a  fair  rate  of  profit  on  the  value  of 
(or  investment  in)  the  property  devoted  to  the  public  use.  How- 
ever, if  to  secure  justice  it  be  necessary  to  determine  the  value 


REGULATION  OF  PRICES  ■      553 

of  (or  the  investment  in)  the  property,  the  simplicity  of  the  plan 
largely  disappears.  Second,  the  limitation  of  profits  may  pos- 
sibly be  evaded  in  part  through  the  payment  of  excessive  salar- 
ies and  bonuses,  or  through  the  diversion  of  the  profits  to  othei 
companies,  not  subject  to  regulation,  which  the  directors  or 
stockholders  of  the  regulated  concern  control  or  at  least  have 
an  interest  in.  Third,  and  more  fundamental,  the  limitation  of 
profits,  when  not  evaded,  removes  the  incentive  to  efficient 
and  progressive  management.  Why  should  a  concern  be  alert 
to  adopt  the  most  economical  and  up-to-date  devices  when  the 
benefits  thereof  are  to  accrue  to  the  state  in  the  form  of  taxes 
or  to  the  consumers  in  the  form  of  reduced  charges?  The  out- 
come, therefore,  of  profit  limitation  is  likely  to  be  the  penalizing 
of  the  producer  without  any  particular  benefit  to  the  public. 
And  even  if  the  state  through  taxation  does  secure  a  slice  of  the 
profits,  the  objection  may  be  raised  that  the  consumers  of  monop- 
olized articles  have  been  mulcted  in  the  interests  of  the  tax- 
payers. 

The  regulation  of  profits,  instead  of  being  employed  as  an 
alternative  to  price  regulation,  may  be  used  as  a  supplement 
thereto.  If  the  governmentally  established  prices,  believed  to 
be  "fair,"  permit  the  earning  of  usually  large  returns,  provision 
may  be  made  for  the  appropriation  by  the  government  of  all  or 
a  part  of  the  profits  over  a  specified  rate.  Such  action  would 
be  analogous  to  that  taken  with  regard  to  railroads  in  the  Esch- 
Cummins  Act,  passed  in  February,  1920.  On  the  outcome  of 
such  measures,  whether  applied  to  railways  or  to  manufacturing 
industries,  it  is  not  possible  to  speak  with  assurance,  yet  there  is 
grave  danger  lest  a  restriction  of  profits  may  result  in  lessened 
efficiency.  Should  this  prove  to  be  the  case  the  producers  would 
lose  and  the  consumers  would  realize  no  gain. 

Certain  possible  consequences  of  a  policy  of  price-fixing, 
giving  rise  to  complex  and  far-reaching  problems,  should  not 
be  overlooked. 

(i)  The  regulation  of  the  prices  of  trust  controlled  products 
may  require  the  regulation  of  the  prices  of  the  raw  materials 
and  supplies  that  enter  into  the  finished  product;  may  require, 


554        THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

for  example,  the  regulation  of  the  price  of  raw  sugar  as  well  as 
of  refined  sugar,  of  crude  steel  as  well  as  of  harvesters.  The 
fixation  of  the  prices  of  the  comparatively  few  products  that 
are  produced  under  monopolistic  conditions  would  be,  as  has 
been  shown,  quite  a  task.  But  to  fix  in  addition  the  prices 
of  all  the  raw  materials  that  enter  into  all  of  the  monopolized 
finished  products  would  be  vastly  more  difficult,  for  there  are 
hundreds,  nay  thousands,  of  these  raw  materials.  And  yet  this 
larger  program  might  prove  necessary  if  the  profits  of  the  busi- 
ness are  not  to  be  unreasonable,  since  a  fall  in  the  price  of  the 
raw  materials  might  very  easily  convert  moderate  profits  in 
manufacturing  into  immoderate  profits.^  Obviously  if  the  price 
of  the  finished  product  is  intended  to  be  sufficiently  high  to 
compensate  all  of  the  producers  whose  output  is  required,  there 
would  be  no  justice  in  permitting  the  trust  (or  any  other  pro- 
ducer) to  appropriate  the  gains  that  arise  through  a  subsequent 
reduction  in  the  cost  of  production  due  to  some  external  factor, 
such  as  a  reduction  in  the  price  of  fuel.  Such  a  reduction  in 
costs  ought  to  be  accompanied  by  a  fall  in  the  price  of  the 
finished  product;  but  this  might  not  prove  practicable  if  the 
oscillations  in  the  prices  of  the  raw  materials  were  frequent 
and  pronounced.  In  order  to  regulate  successfully  the  prices 
of  finished  products,  therefore,  it  might  prove  necessary  to  exer- 
cise control  over  the  prices  of  raw  materials  as  well.  However, 
it  may  be  anticipated  that  this  step  would  be  taken  but  gradu- 
ally; and  if  the  price-fixing  agency  satisfied  itself  with  approx- 
imations to  reasonable  prices,  it  would  perhaps  never  be  taken. 
It  is  referred  to,  therefore,  merely  as  a  possible  consequence  of 
price  regulation. 

(2)  The  regulation  of  prices  may  involve  the  regulation  of 
wages.  The  experience  of  the  Interstate  Commerce  Commission 
makes  it  clear  that  if  regulation  of  charges  has  been  success- 
fully applied  for  some  time  the  margin  between  receipts  and 

1  In  the  case  of  oil,  sugar,  tobacco,  and  some  other  articles  the  price  of  the 
finished  product  might  be  made  to  bear  some  percentage  relation  to  the  price 
of  the  raw  material,  thus  obviating  the  necessity  of  fixing  the  price  of  the 
latter.    Yet  this  would  by  no  means  be  feasible  for  all  products. 


REGULATION  OF  PRICES  .  555 

expenses  may  become  so  narrow  that  an  adequate  margin  will 
easily  be  converted  into  an  inadequate  one  by  virtue  of  an  in- 
crease in  wages  not  accompanied  by  increased  efficiency  or 
increased  volume  of  business.  There  thus  arises  in  time,  par- 
ticularly when  the  prices  of  materials  and  supplies  are  also 
advancing,  a  demand  on  the  part  of  the  railroads  that  the  agency 
that  controls  rates  be  forced  to  fix  the  wages  of  labor  also;  and 
while  we  have  not  yet  taken  this  step  in  this  country  there  is 
some  reason  to  believe  that  we  are  approaching  it.  In  fact,  the 
Esch-Cummins  Act  of  1920  created  a  Railroad  Labor  Board 
with  authority  to  decide  disputes  concerning  wages.  We  thus 
have  in  the  railroad  industry  one  government  agency  fixing 
railroad  rates,  and  another  government  agency  fixing  the  wages 
of  railroad  employees.  The  situation  is  anomalous;  and  can 
hardly  be  expected  to  endure,  unless  indeed  there  is  an  unusual 
degree  of  cooperation  between  these  two  bodies.  Likewdse 
if  the  government  assumes  the  duty  of  fixing  the  prices  of 
trust  controlled  products  it  may  eventually  be  forced  to  exer- 
cise control  over  wages  as  well.  The  prospect  is  remote,  per- 
haps; and  even  if  it  should  some  day  come  to  that,  the  problem 
would  not  be  insuperable,  because  the  wages  paid  in  industries 
not  subject  to  regulation  would  set  a  standard  to  which  the 
wages  in  the  regulated  industries  might  be  expected  to  conform 
more  or  less  closely.  The  price-fixing  agencies  would  hardly, 
therefore,  be  obliged  to  set  up  general  standards  of  justice  for 
wages. 

(3)  The  regulation  of  manufacturers'  prices  may  require  the 
limitation  of  dealers '  margins.  The  ability  of  the  trust  to  charge 
more  than  a  competitive  price  results  from  its  restriction  of  the 
supply.  If  then  by  government  fiat  it  is  forbidden  to  charge 
more  than  a  reasonable  price,  what  is  to  prevent  the  dealers 
to  whom  it  may  dispose  of  its  product  from  taking  advantage, 
temporarily  at  least,  of  the  scarcity,  and  appropriating  what 
the  trust  might  have  retained  had  it  not  been  for  the  action  of 
the  government?  During  the  war  the  Fuel  and  Food  Adminis- 
trations found  regulation  of  the  dealers'  margins  necessary; 
and  might  not  similar  action  prove  advisable  even  in  peace 


556       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

times  whenever  there  was  a  decided  scarcity?  To  be  sure,  the 
purpose  of  price  regulation,  as  noted  earher,  would  be  to  fix 
a  price  at  which  the  demand  and  supply  would  be  in  true  equi- 
librium, yet  because  of  the  changing  conditions  of  demand  and 
the  uncertain  conditions  of  supply  it  would  not  be  possible  to 
realize  this  ideal  arrangement.  Is  it  not  conceivable,  therefore, 
that  regulation  of  trust  prices  may  eventually  lead  to  govern- 
mental control  of  the  whole  price-making  machinery  in  numer- 
ous industries? 

(4)  Regulation  of  prices  may  possibly  lead  to  government 
ownership  and  management.  If  the  people  permit  monopoUes 
to  exist  but  endeavor  to  regulate  them,  they  may  find  the  task 
of  regulation  so  complex  and  embarrassing  as  to  induce  them  to 
attempt  an  effective  control  through  the  ownership  of  the  busi- 
ness. While  government  ownership  would  doubtless  be  pref- 
erable to  ineffective  price  control,  it  does  not  follow  that  it 
would  be  preferable  to  private  ownership  under  truly  competi- 
tive conditions,  and  particularly  when  the  methods  of  competi- 
tion are  fair  and  sportsmanhke.  Yet  to  return  to  a  state  of  com- 
petition would  be  difficult,  if  not  impossible,  if  through  the 
removal  of  the  ban  on  monopoly  the  trust  movement  had  mean- 
while assumed  such  proportions  as  might  be  anticipated  were 
trust  promoters  undisturbed  by  fear  of  the  law.  When,  how- 
ever, the  industries  in  question  are  naturally  monopolistic, 
there  is  no  occasion  to  refrain  from  experiments  in  price  regula- 
tion from  a  fear  that  the  return  to  a  state  of  competition  will 
be  precluded,  since  the  determination  of  prices  by  competitive 
factors  in  such  industries  is  by  hypothesis  an  economic  impos- 
sibility. 

(5)  Regulation  of  prices  may  contribute  to  reduced  efiiciency 
and  initiative.  What  is  a  fair  rate  of  profit  in  any  industry 
depends  on  the  prospects  of  being  confronted  with  additional 
competition.  A  company  that  is  protected  against  "inter- 
lopers" will  be  satisfied  with  a  lower  return  than  if  it  must  take 
its  chances  with  new  competitors.  In  order,  therefore,  to  bring 
down  the  rate  of  profit  and  the  price,  the  government  may 
substantially  guarantee  the  trust  immunity  from  the  rivalry 


REGULATION  OF  PRICES  557 

of  new  enterprises.  The  infusion  of  new  blood  being  prevented, 
a  decline  in  the  efficiency  and  progressiveness  of  the  management 
may  take  place  in  the  course  of  time. 

(6)  Other  problems  that  may  be  referred  to  in  passing  are: 
the  maintenance  of  the  quality  of  the  controlled  articles;  the 
apportionment  of  the  controlled  articles  in  the  event  of  a  scarc- 
ity; ^  the  treatment  of  long  term  contracts;  and  the  advisability 
of  establishing  actual  prices  or  only  maximum  prices. 

From  the  foregoing  considerations  it  is  evident  that  the  regu- 
lation of  the  prices  of  trust  controlled  products  involves  a  very 
considerable  extension  of  government  authority.  Just  how  far 
this  extension  would  go  only  experience  could  determine.  Yet  it 
is  certain  that  the  government  would  have  to  collect  currently  a 
vast  amount  of  infonnation  concerning  capital  investment,  costs, 
profits,  prices,  production,  and  stocks.  It  would  undoubtedly 
have  to  prescribe  the  methods  of  accounting  to  be  employed  in 
the  different  industries.  It  would  have  to  study  the  factors 
affecting  demand — requirements,  as  it  was  called  during  the  war. 
The  determination  of  the  requirements  would  compel  a  long  look 
ahead,  just  as  during  the  war  those  officials  who  were  responsible 
for  the  army  and  na\y  program  were  obliged  to  make  provi- 
sion for  future  needs  many  months  in  advance.  The  govern- 
ment would  have  to  maintain  the  quality  of  the  articles  whose 
prices  were  fixed,  since  otherwise  the  objects  of  trust  regulation 
would  be  defeated.  All  this  program  would  necessitate  a  large 
force  of  accountants,  statisticians,  la^vyers,  engineers,  and  experts; 
and  would  in\^ol\'e  a  considerable  degree  of  duplication,  since  the 
concerns  that  are  to  be  regulated  also  have  to  maintain  statistical 
and  operating  staffs.  During  the  war  considerable  reliance  was 
placed  on  a  volunteer  army  of  inspectors,  who  from  patriotic 
motives  were  zealous  to  protect  the  government  against  traitors; 
but  in  normal  times  the  government  can  not  depend  on  such 
assistance.  And  if  it  appeared  that  the  successful  regulation  of 
prices  required  also  the  control  of  wages,  the  control  of  dealers' 
margins,  and  the  control  of  distribution  generally,  the  authority 

1  In  November,  igig,  the  government  resumed  war-time  control  over  the 
distribution  of  soft  coal  to  meet  the  emergency  created  by  the  strike. 


558       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

of  the  government  would  be  vastly  extended,  and  the  number  a  ■ 
those  who  could  be  producers  were  they  not  obliged  to  regulate 
the  producers  would  be  much  increased.  Of  course  preser  ^  day 
conditions  compel  the  exercise  of  government  control  in  many 
lines,  and  thus  there  must  be  some  considerable  diversion  of 
potential  producers  into  lines  of  regulation,  yet  the  fact  must 
not  be  lost  sight  of  that  in  so  far  as  some  people  are  obliged  by  the 
necessities  of  the  case  to  supervise  others  they  are  estopped  from 
being  producers  themselves,  even  though  in  our  technical  par- 
lance we  call  them  productive  laborers. 

The  advocates  of  price  regulation  in  justifying  their  belief 
in  its  efficacy  commonly  point  to  the  successful  regulation 
of  the  railroads  by  the  Interstate  Commerce  Commission. 
However,  in  view  of  the  long-continued  and  widespread 
discussion  of  the  seriousness  of  the  railroad  problem  it 
would  hardly  appear  that  this  matter  has  been  solved 
as  yet.  The  officials  of  the  railroads  and  the  security  owners 
have  long  accused  the  Commission  of  starving  the  roads;  and 
the  railroad  employees  have  voiced  their  dissatisfaction  with 
governmental  regulation  by  demanding  government  ownership. 
And  if  it  be  conceded  that  regulation  has  been  successful  in 
preventing  unreasonable  rates  and  unreasonable  profits,  it  must 
be  remembered  that  the  task  of  the  Commission  has  been 
lightened  in  one  respect  by  the  steady  increase  in  the  prices  of 
commodities  and  in  the  wages  of  labor.  If  railroad  profits  were 
excessive  during  the  period  preceding  effective  governmental 
regulation,  say  prior  to  1910, — we  will  assume  this  without 
discussing  the  point — the  Commission  would  have  found  great 
difficulty,  had  the  price  level  remained  unchanged,  in  establish- 
ing a  level  of  rates  that  permitted  only  reasonable  profits.  Even 
granting  that  it  had  the  power,  the  opposition  it  would  have 
encountered  would  have  been  enormous.  But  as  it  was,  with 
railroad  costs  steadily  rising  after  19 10,  and  particularly  after 
1914,  all  that  the  Commission  had  to  do  was  to  refuse  rate 
increases.  The  fact  that  the  Commission  has  steadily  pared 
down  railroad  profits  by  forbidding  rate  increases — a  fairly 
'effective  device  in  a  period  of  rising  prices — does  not  prove  that 


REGULATION  OF  PRICES  559 

it  would  steadily  pare  down  these  profits,  if  unreasonable,  by  an 
actual  reduction  of  rates,  as  would  be  necessary  perhaps  in  a 
period  of  falling  prices  and  wages. 

However,  if  the  success  of  the  Interstate  Commerce  Commis- 
sion be  conceded,  a  similar  success  is  not  assured  in  the  case  of  the 
trusts.  This  is  because  one  commission  would  hardly  suffice  for 
the  trusts,  as  one  commission  has  sufficed  to  date  after  a  fashion 
for  the  railroads.  A  commissioner  familiar  with  railroad  prob- 
lems can  turn  with  facility  from  the  regulation  of  one  road  to  the 
regulation  of  another,  though  when  there  are  added  the  express 
companies,  the  sleeping  car  companies,  the  telegraph  and  tele- 
phone companies,  and  the  like,  the  difficulties  increase.  But  were 
all  trusts  to  be  controlled,  the  great  differences  in  the  character  of 
the  several  businesses  would  probably  make  it  necessary  to  have 
numerous  conmiissions  covering  the  various  industries  or  groups 
of  industry.  This  necessary  increase  in  the  number  of  appoint- 
ments and  the  consequent  diffusion  of  responsibility  would 
militate  against  effective  control.  Moreover,  it  would  work 
injustice  as  between  industries,  since  some  price  commissions 
would  doubtless  prove  radical  and  some  conservative,  and  as  a 
result  the  channels  into  which  the  country's  productive  re- 
sources would  be  turned  would  be  dictated  in  part  by  the  temper 
of  governmental  officials  rather  than,  as  it  should  be  in  a  regime 
of  private  enterprise,  entirely  by  natural  opportunities.  The 
prospect  when  thus  viewed  is  not  inviting. 

Notwithstanding  the  problems  and  difficulties  of  price  regula- 
tion, a  program  of  price  regulation  may  yet  assist  in  the  solution 
of  the  trust  problem. 

If  the  trust  be  the  most  efficient  business  unit,  the  case  for  the 
retention  of  the  trust  form  of  organization  and  for  a  consequent 
policy  of  price  regulation  is  a  strong  one.  The  inherent  difficult- 
ies are  impressive — no  attempt  has  been  made  to  gloss  over  them 
— yet  reliance  can  hardly  be  placed  upon  the  safeguards  emmier- 
ated  in  chapter  XI. ^  The  only  alternative,  therefore,  is  some 
social  arrangement  that  takes  the  ownership  or  control  of  the 
trust  properties  out  of  the  hands  of  the  present  individual  own- 
1  Cf.  pp.  276  seq. 


56o       THE  TRUST  PROBLEM  IN  THE  UNITED  STATES 

ers,  and  vests  it  in  the  people,  or  in  some  limited  group,  such  as 
the  workers  in  the  monopolized  industry.  Into  the  merits  of 
these  suggestions  it  is  not  now  proposed  to  go;  the  result  would 
be  to  carry  the  discussion  too  far  afield.  But  it  must  be  clear 
that  if  the  determination  of  prices  by  competitive  forces  is  not 
to  prevail,  an  effective  argument  can  be  presented  for  govorn- 
mental  fixation  of  prices.  Probably  the  government  could  not 
hope  to  do  more  than  approximate  a  fair  price,  yet  the  prices 
established  by  it  would  doubtless  come  nearer  to  being  fair  than 
would  the  prices  to  be  charged  by  trusts  in  the  absence  of  govern- 
mental regulation.  Moreover,  the  fact  that  the  government 
had  the  reserved  power  to  fix  prices  might  induce  the  trusts  to 
pursue  a  moderate  price  policy,  and  might  therefore  render 
unnecessary  the  actual  exercise  of  the  power  except  occasionally 
and  in  individual  instances.  How  successful  regulation  would 
prove  to  be  would  depend  of  course  on  the  state  of  public  opin- 
ion, and  upon  the  intelligence  and  viewpoint  and  character  of  the 
individuals  administering  the  scheme  of  regulation. 

If,  on  the  other  hand,  the  trust  is  not  the  most  efficient  busi- 
ness unit,  price  regulation  might  still  be  employed  as  a  supple- 
ment to  dissolution.  Though  the  policy  of  the  government  dur- 
ing numerous  administrations  has  been  to  restore  competition  by 
dissolving  the  trusts,  this  policy  has  by  no  means  been  fully 
successful.  Whether  it  will  ever  prove  fully  successful  is  an  open 
question,  which  time  alone  can  determine.  Meanwhile  it  would 
appear  that  the  government  might  with  propriety  couple  its 
measures  of  dissolution  with  such  further  measures  as  are  calcu- 
lated to  protect  the  people  against  the  failure  of  its  dissolution 
program  to  produce  results.  Among  these  measures  obviously 
is  the  control  of  prices.  However,  as  soon  as  it  appeared  that  the 
dissolution  proceedings  had  led  to  the  restoration  of  competition 
in  any  particular  industry,  control  over  prices  in  that  industry 
might  properly  cease. 

In  another  connection  also  the  regulation  of  prices  may 
prove  useful.  Even  in  industries  in  which  trusts  have  not  been 
formed,  agreements  or  understandings  that  operate  to  restrain 
competition  are  widespread.    These  agreements  may  be  highly 


REGULATION  OF  PRICES  561 

informal  in  character,  and  legal  evidence  of  their  existence 
and  nature  may  be  impossible  to  secure.  They  are  hardly 
open  to  legal  attack,  therefore,  and  yet  they  may  be  quite 
effective  in  maintaining  prices  above  a  competitive  level.  It  is 
said  that  "you  can  not  make  men  compete,"  and  the  question  is 
properly  asked  what  is  to  be  done  in  such  cases.  There  would 
seem  to  be  only  two  alternatives.  Since  the  aforementioned 
\dolations  of  the  spirit,  as  well  as  of  the  letter,  of  the  Sherman  Act 
are  responsible  for  the  abandonment  (in  those  particular  indus- 
tries) of  competition  as  a  regulator  of  prices  and  profits,  the 
government  must  embark  either  upon  a  scheme  of  regiilation, 
or  upon  a  program  of  public  ownership.  ^ 


CHAPTER  XXI 
CONCLUSION 

The  conclusions  of  the  preceding  chapters  may  be  summar- 
ized in  brief.  The  modern  trusts  were  organized  primarily  for 
the  purpose  of  suppressing  or  restricting  competition,  and  thus  of 
securing  monopoly  prices  and  profits.  An  incidental  considera- 
tion was  the  prospect  of  large  profits  for  the  promoters.  In  the 
prospectuses  offering  the  securities  of  the  trusts  to  the  pubHc 
much  was  made  of  thd  economies  of  the  trust  form  of  organiza- 
tion; and  the  trusts  were  able  to  realize  a  considerable  number  of 
savings  that  were  not  open  to  less  all-embracing  business  units. 
Nevertheless,  if  the  conclusions  of  chapter  XIX  are  warranted, 
the  desire  to  reduce  costs  was  not  the  main  reason  for  the  forma- 
tion of  trusts;  and  though  twenty  years  have  elapsed  since  the 
outbreak  of  the  modern  trust  movement,  the  economic  superi- 
ority of  trusts  over  less  comprehensive  corporate  units  has  not 
been  established.  Moreover,  though  competition  was  keen  prior 
to  the  formation  of  trusts,  it  was  not  ruinous;  and  therefore  the 
creation  of  these  mammoth  organizations  can  not  be  explained 
on  the  ground  of  economic  necessity.  The  foregoing  considera' 
tions  serve  to  account  for  the  anti-trust  legislation  that  had  as  its 
object  the  removal  of  impediments  to  the  free  play  of  competitive 
forces,  and  to  explain  the  series  of  dissolution  suits  instituted 
by  successive  administrations. 

What  has  been  the  result  of  all  this  agitation  and  legislation 
and  prosecution?  It  would  appear  that  much  has  been  accom- 
plished toward  placing  business  on  a  higher  moral  plane.  Fair 
methods  of  competition  in  commerce  have  been  promoted,  and 
the  policy  of  oppression  of  competitors  has  been  moderated  in 
response  to  public  opinion  and  to  fear  of  the  law.  Moreover, 
many  concerns  have  reorganized  their  affairs  to  meet  the  wishes 
of  the  prosecuting  branch  of  the  government.     Furthermore, 

562 


CONCLUSION  •        563 

still  others  have  been  forced  by  court  decrees  to  dissolve  into  a 
number  of  potentially  competitive  units,  and  have  been  enjoined 
against  the  emplojonent  of  sundry  anti-social  tactics. 

Yet  the  fact  remains  that  the  onslaught  on  trusts  has  met  with 
only  a  partial  success.  Trusts  have  been  dissolved,  to  be  sure, 
yet  in  most  cases  haltingly  and  ineffectively;  and  competition 
continues  to  be  restrained  despite  the  prohibitions  of  law  and  the 
pressure  of  public  opinion. 

The  explanation,  in  part  at  least,  is  that  the  trust  problem  is 
highly  complex,  and  that  our  legislation  has  not  taken  this  fact 
sufficiently  into  account.  The  sources  of  monopoly  power  are 
numerous.  Some  trusts  derive  their  strength  from  the  use  of 
unfair  methods  of  competition,  notably  local  price  cutting, 
railroad  discrimination,  factors'  agreements,  espionage,  intimi- 
dation, and  the  like.  Some  are  grounded  on  the  land,  maintain- 
ing a  well-nigh  impregnable  position  through  the  ownership  of  a 
limited  natural  resource.  Others  are  based  upon  patents,  a 
monopoly  granted  by  the  government  for  the  encouragement  of 
invention,  but  utilized  by  trust  organizers  to  serve  their  selfish 
ends.  Still  others  owe  their  position  to  the  act  of  combination; 
and  they  may  or  may  not  be  supported  by  artificial  props.  In  all 
of  the  cases  just  mentioned  the  protective  tariff  may  be  a  con- 
tributing factor  through  its  narrowing  of  the  possible  field  of 
competition. 

If,  then,  the  purposes  of  the  anti-trust  laws  are  to  be  achieved, 
it  is  evident  that  unfair  methods  of  competition  must  be 
eliminated;  the  monopolization  of  natural  resources  must  be 
prevented,  by  socialization  if  necessary;  the  patent  laws  must  be 
revised;  trust  dissolutions  must  be  made  more  effective;  and  the 
tariff  must  be  reformed — a  far-reaching  program,  and  yet  it 
would  appear  that  in  no  other  way  can  there  be  secured  a  fair 
field  for  all  and  favors  to  none. 

The  restoration  of  competitive  conditions  would  be  greatly 
expedited  by  the  reform  of  our  corporation  laws,  and  in  partic- 
ular by  the  requirement  that  all  corporations  engaged  in  inter- 
state commerce  be  compelled  to  take  out  a  federal  charter.^ 

1  On  this  subject  see  Report  of  the  Commissioner  of  Corporations,  1904; 


564        THE  TRUST  PROBLEM  IN  THE  UNITED  !5TATES 

As  matters  now  stand  the  corporation  laws  of  the  several  states 
are  quite  diverse;  ^  and  the  laws  of  one  state  may  be  largely  nulli- 
fied by  the  laxity  and  complacency  of  another  state.  This  is 
clearly  a  situation  calling  for  uniformity;  and  yet  this  is  hardly 
possible  when  so  many  states  and  interests  are  involved.  The 
constitutionality  of  compulsory  federal  incorporation, — if  there 
is  to  be  federal  incorporation,  nothing  less  than  compulsory  in- 
corporation will  suffice,— is  a  matter  upon  which  eminent  lawyers 
disagree,  though,  as  a  matter  of  course,  the  constitution  could  be 
amended;  and  probably  time  would  be  saved  in  the  end  in  the 
solution  of  many  problems,  if  this  preliminary  step  were  taken 
at  once.  If  federal  incorporation  appears  too  drastic  or  likely  to 
be  too  long  delayed,  there  is  the  possibility  of  requiring  merely 
that  corporations  engaged  in  interstate  commerce  secure  a  fed- 
eral license  as  a  prerequisite  to  engaging  therein.  The  granting 
of  such  a  license  (the  constitutionality  of  which  appears  to  be 
undisputed),  like  the  granting  of  a  federal  charter,  could  be  made 
contingent  upon  the  observance  by  the  corporation  of  such  con- 
ditions as  the  federal  government  might  see  fit  to  impose;  and, 
in  the  event  of  noncompliance  with  these  requirements,  the 
license  or  charter  could  be  revoked.  In  this  way  the  authority 
of  the  government  would  be  fully  affirmed.  Into  the  respective 
merits  of  federal  incorporation  and  federal  license  of  state  cor- 
porations it  is  not  proposed  to  go;^  the  important  thing  is  for  the 
government  promptly  and  fully  to  assert  its  complete  authority 
over  the  instrumentalities  of  interstate  commerce. 

If,  however,  the  destruction  of  the  trusts  is  not  deemed  feas- 
ible, or  even  socially  desirable,  there  are  two  alternatives: 
(i)  The  trusts  may  be  permitted  to  continue  as  privately  owned 
monopolies,  their  potentiaHties  for  evil  being  removed,  so  far  as 

Wilgus,  Michigan  Law  Review,  2,  pp.  358-395.  Soi-596;  Wilgus,  ibid.,  3, 
pp.  264-281;  Wilgus,  Reports  of  American  Bar  Association,  27,  pp.  694-753; 
and  Heisler,  Federal  Incorporation. 

1  The  Commissioner  of  Corporations  in  his  annual  report  for  1904  stated 
that  this  diversity  was  so  great  that  in  operation  it  amounted  to  "anarchy." 

-  See  Report  of  the  Commissioner  of  Corporations,  1904,  especially  Ap- 
pendix C;  Wilgus,  Michigan  Law  Review,  2,  p.  394,  and  3,  pp.  264-281;  and 
Wilgus,  Reports  of  American  Bar  Association,  27,  pp.  745~753- 


CONCLUSION  565 

possible,  through  governmental  regulation  of  their  prices,  securi- 
ties, and  the  like,  following  the  analogy  of  the  Interstate  Com- 
merce Commission.  The  difficulties  that  are  likely  to  be  en- 
countered in  carrying  out  this  program  are  impressive,  as  was 
shown  in  the  preceding  chapter.  (2)  The  other  alternative  is  the 
socialization  of  the  monopolized  industries.  For  this  step  the 
country  is  not  yet  ready,  and  perhaps  may  never  be.  Yet  it 
would  appear  to  be  the  most  satisfactory  course  short  of  a  return 
to  a  competitive  regime  in  which  men  are  free  to  produce  what 
they  will,  and  in  which  their  rewards  are  roughly,  though  by  no 
means  exactly,  in  proportion  to  their  contribution  to  the  na- 
tional product. 

It  is  recognized  that  change  is  the  law  of  life,  and  that  a 
return  to  a  competitive  regime  may  not  be  the  will  of  the  gods. 
The  young  poet,  in  Pauline,  dreamed  not  of  restraint  but  gazed 
on  all  things  ("schemes  and  systems  went  and  came").  He 
found,  or  thought  he  found,  "a  key  to  a  new  world."  And  in 
economic  realms  as  well,  in  the  minds  of  forward-looking  men 
there  are  schemes  and  systems  and  theories  innumerable,  toward 
one  of  which  the  world  may  possibly  be  marching — for  who  can 
say  w^hat  the  future  ^\^ll  bring?  It  is  conceivable  (to  a  poet  at 
least)  that  ^^^thin  our  day  this  generation  may  embark  upon  new 
ventures  into  hitherto  uncharted  economic  seas. 

But  this  book  is  a  record  of  one  phase  of  our  modern  indus- 
trial life  (the  most  important  phase  of  this  industrial  life) — 
not  an  account  or  an  appraisement  of  other  phases,  nor  a 
prophecy  of  what  is  to  be. 


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part  I,  Position  of  the  Standard  Oil  Company  in  the  Petroleum  Indus- 
try, May  20,  1907;  part  2,  Prices  and  Profits,  August  5,  1907. 

U.  3.  Commissioner  of  Corporations.  Report  of  the  Bureau  of  Corpora- 
tions to  the  President  on  Prices  of  Tobacco,  Senate  Document  no.  78, 
6 1  St  Cong.,  ist  Sess.,  1909. 

U.  S.  Commissioner  of  Corporations.  Report  on  the  Tobacco  Industry, 
part  I,  Position  of  the  Tobacco  Combination  in  the  Industry,  Feb- 
ruary 25,  1909;  part  2,  Capitalization,  Investment,  and  Earnings, 
September  25,  1911;  part  3,  Prices,  Costs,  and  Profits,  March  15,  1915. 

U.  S.  Commissioner  of  Corporations.  Report  on  the  Steel  Industry, 
part  I,  Organization,  Investment,  Profits,  and  Position  of  United 
States  Steel  Corporation,  July  i,  191 1;  part  2,  Cost  of  Production, 
Preliminary  Report,  January  22,  1912;  part  3,  Cost  of  Production, 
Full  Report,  May  6,  1913. 

U.  S.  Commissioner  of  Corporations.  Report  on  the  International  Har- 
vester Company,  March  3,  1913. 

U.  S.  Commissioner  of  Corporations.  Trust  Laws  and  Unfair  Competi- 
tion, March  15,  1915. 

U.  S.  Committee  Reports.  Report  from  Committee  on  Judiciary  on 
Joint  Resolution  proposing  an  amendment  to  the  Constitution  of 
the  United  States  conferring  power  on  Congress  to  define,  regulate, 
prohibit,  and  dissolve  trusts.  House  Report  no.  1501,  56th  Cong., 
ist  Sess.,  1899-1900. 

U.  S.  Committee  Reports.  Report  from  Committee  on  Judiciary  to  ac- 
company H.  R.  10539,  a  bill  to  amend  the  Sherman  Act.  House  Re- 
port no.  ^.506,  56th  Cong.,  ist  Sess.,  1899-1900. 


576  BIBLIOGRAPHY 

U.  S.  Committee  Reports.  Report  from  Committee  on  Interstate  and 
Foreign  Commerce  to  accompany  S.  569.  House  Report  no.  2970,  57th 
Cong.,  2nd  Sess.,  1902-1903. 
U.  S.  Committee  Reports.  Report  from  Committee  on  Judiciary  to  ac- 
company H.  R.  17.  House  Report  no.  3375,  57th  Cong.,  2nd  Sess., 
1902-1093. 

U.  S.  Committee  Reports.  Report  from  Committee  on  Judiciary  to  ac- 
company S.  6440.  Senate  Report  no.  848,  60th  Cong.,  2nd  Sess., 
1908-1909. 

U.  S.  Committee  Reports.  Report  on  American  Sugar  Refining  Company 
and  others  from  Special  Committee.  House  Report  no.  331,  62nd 
Cong.,  2nd  Sess.,  191 2. 

U.  S.  Committee  Reports.  Report  on  Unlawful  Restraints  and  Monopo- 
lies from  Committee  on  Judiciary.  Senate  Report  no.  698,  63rd 
Cong.,  2nd  Sess.,  1913-1914. 

U.  S.  Committee  Reports.  Report  on  Federal  Trade  Commission  from 
Committee  on  Interstate  Commerce.  Senate  Report  no.  597,  63rd 
Cong.,  2nd  Sess.,  1913-1914. 

U.  S.  Committee  Reports.  Report  from  Committee  on  Judiciary  to  ac- 
company H.  R.  15657.  House  Report  no.  627,  63rd  Cong.,  2nd  Sess., 
1913-1914. 

U.  S.  Committee  Reports.  Report  from  Committee  on  Interstate  and 
Foreign  Commerce  on  proposed  amendments  to  section  20  of  the  Act 
to  Regulate  Commerce.  House  Report  no.  681,  63rd  Cong.,  2nd  Sess., 
1913-1914. 

U.  S.  Committee  Reports.  Report  from  Committee  on  Interstate  and 
Foreign  Commerce  to  accompany  H.  R.  15613.  House  Report  no. 
533,  63rd  Cong.,,  2nd  Sess.,  1913-1914. 

U.  S.  Committee  Reports.  Promotion  of  Export  Trade.  House  Report 
no.  1 1 18,  64th  Cong.,  ist  Sess.,  1916. 

U.  S.  Committee  Reports.  Export  Trade.  Senate  Report  no.  1056,  64th 
Cong.,  2nd  Sess.,  1917. 

U.  S.  Committee  Reports.  Export  Trade.  Senate  Report  no.  9,  65  th 
Cong.,  ist  Sess.,  1917. 

U.  S.  Committee  Reports.  Promotion  of  Export  Trade.  House  Report 
no.  50,  65th  Cong.,  ist  Sess.,  191 7. 

U.  S.  Committee  Reports.  Export  Trade.  Senate  Report  no.  109,  65th 
Cong.,  ist  Sess.,  1917. 

U.  S.  Congressional  Investigation.  Report  on  Investigation  of  Trusts. 
House  Report  no.  3112,  vol.  9,  50th  Cong.,  ist  Sess.,  1887-1888. 

U.  S.  Congressional  Investigation.  Investigation  of  the  Whiskey  Trust 
and  the  Cotton  Bagging  Combination.  House  Report  no.  4165,  vol. 
3,  50th  Cong.,  2nd  Sess.,  1888-1889. 

U.  S.  Congressional  Investigation.  Transportation  and  Sale  of  Meat  Prod- 
ucts.   Senate  Report  no.  829,  vol.  3,  51st  Cong.,  ist  Sess.,  1889-1890. 


BIBLIOGRAPHY  577 

U.  S.  Congressional  Investigation.     Whiskey  Trust  Investigation.     House 

Report  no.  2601,  vol.  3,  52nd  Cong.,  2nd  Sess.,  1892-1893. 
U.  S.  Congressional    Investigation.     Hearings   before   Special    Committee 

on  Investigation  of  American  Sugar  Refining  Company,  1911-1912. 
U.  S.    Congressional  Investigation.    Control  of  Corporations,  Persons,  and 

Firms  engaged  in  Interstate  Commerce.     Report  of  the  Senate  Com- 
mittee on  Interstate  Commerce,  in  two  volumes,  1913.     Pursuant  to 

S.  Res.  98,  62nd  Cong. 
U.  S.  Congressional  Investigation.     Hearings  on  Trust  Legislation  before 

the  House  Committee  on  the  Judiciary,  in  two  volumes,  63rd  Cong., 

2nd  Sess.,  1914. 
U.  S.  Congressional  Investigation.     Hearings  held  before  the  sub-committee 

of  the  Senate  Committee  on  the  Judiciary  on  the  amendment  of  the 

Sherman  Anti-Trust  Law,  60th  Cong.,  ist  Sess.,  1908. 
U.  S.    Congressional  Investigation.    Pulp  and  Paper  Investigation  Hearings, 

House  Document  no.  1502,  60th  Cong.,  2nd  Sess.,  1908-1909.     In 

five  volumes. 
U.  S.  Congressional  Investigation.      Hearings    before  the  Committee  on 

Investigation  of  United  States  Steel  Corporation.     House  Report  no. 

1127,  62nd  Cong.,  2nd  Sess.,  1911. 
U.   S.     Congressional    Investigation.     Hearing    on    Price    Regulation   of 

Steel  before  Senate  Committee  on  Interstate  Commerce,  65th  Cong., 

ist  Sess.,  1917. 
U.  S.  Congressional  Record. 
U.  S.  Court  Decisions.     Dolph  v.  Troy  Laundry  Machinery  Co.    Decided 

in  1886.    28  Fed.  Rep.  SS3-SS9- 
U.  S.  Court  Decisions.    U.  S.  v.  Patterson  et  al.     Decided  February  28, 

1893.  55  Fed.  Rep.  605-642. 

U.  S.  Court  Decisions.     U.  S.  v.  Patterson  et  al.    Decided  June  i,  1893. 

59  Fed.  Rep.  280-284. 
U.  S.  Court  Decisions.    U.  S.  v.  E.  C.  Knight  Co.  et  al.    Decided  January 

30,  1894.     60  Fed.  Rep.  306-310. 
U.  S.  Court  Decisions.     U.  S.  v.  E.  C.  Knight  Co.  et  al.  Decided  March  26, 

1894.  60  Fed.  Rep.  934-937. 

U.  S.  Court  Decisions.  U.  S.  v.  Addyston  Pipe  and  Steel  Co.  et  al.  De- 
cided February  5,  1897.    78  Fed.  Rep.  712-724. 

U.  S.  Court  Decisions.  U.  S.  v.  Addyston  Pipe  and  Steel  Co.  et  al.  Decided 
February  8,  1898.    85  Fed.  Rep.  271-302. 

U.  S.  Court  Decisions.  U.  S.  v.  Northern  Securities  Co.  et  al.  Decided 
April  9,  1903.  120  Fed.  Rep.  721-732. 

U.  S.  Court  Decisions.  U.  S.  v.  Swift  and  Co.  et  al.  Decided  April  18,  1903. 
122  Fed.  Rep.  529-535- 

U.  S.  Court  Decisions.  Continental  Wall  Paper  Co.  v.  Lewis  Voight 
and  Sons  Co.  Decided  January  5,  1906.  148  Fed.  Rep.  939- 
953- 


578  BIBLIOGRAPHY 

U.  S.  Court  Decisions.    U.  S.  v.  American   Tobacco  Co.  et  al.    Decided 

November  7,  1908.    164  Fed.  Rep.  700-728. 
U.  S.  Court  Decisions.    U.  S.  v.  Standard  Oil  Co.  of  New  Jersej^  et  al. 

Decided  November  20,  1909.    173  Fed.  Rep.  177-200. 
U.  S.  Court  Decisions.    U.  S.  v.  E.  I.  du  Pont  de  Nemours  and  Co.  et  al. 

Decided  June  21,  1911.    188  Fed.  Rep.  127-156. 
U.  S.  Court  Decisions.     U.  S.  v.  American  Tobacco  Co.  et  al.      Decided 

November  15,  1911.    191  Fed.  Rep.  371-431. 
U.  S.  Court  Decisions.     U.  S.  v.  International  Har\-ester  Co.  et  al.    Decided 

August  12,  1914.    214  Fed.  Rep.  987-1012. 
U.  S.  Court  Decisions.     U.  S.  v.  Keystone  Watch  Case  Co.  et  al.     Decided 

January  2,  1915.    218  Fed.  Rep.  502-519. 
U.  S.  Court  Decisions.     U.  S.  v.  United  Shoe  Machinery  Co.  of  New  Jersey. 

Decided  March  18,  1915.    222  Fed.  Rep.  349-415. 
U.  S.  Court  Decisions.     Patterson  et  al.  v.  U.  S.    Decided  March  13,  1915. 

222  Fed.  Rep.  599-650. 
U.  S.  Court  Decisions.     U.  S.  v.  United  States  Steel  Corporation.    Decided 

June  3,  1915.    223  Fed  .Rep.  55-i79- 
U.  S.  Court   Decisions.     U.  S.  v.  Motion  Picture   Patents    Co.     Decided 

October  i,  1915.     225  Fed.  Rep.  800-812. 
U.  S.  Court   Decisions.     U.  S.  v.  Eastman    Kodak    Co.  et  al.     Decided 

August  24,  1915.    226  Fed.  Rep.  62-81. 
U.  S.  Court  Decisions.     U.  S.  v.  American  Can  Co.     Decided  February  23, 

1916.    230  Fed.  Rep.  859-904. 
U.  S.  Court  Decisions.    U.  S.  v.  Quaker  Oats  Co.    Decided  April  21,  1916. 

232  Fed.  Rep.  499-508. 
U.  S.  Court  Decisions.    U.  S.  v.  Corn  Products  Refining  Co.    Decided  June 

24,  1916.    234  Fed.  Rep.  964-1018. 
U.  S.  Court  Decisions.    U.  S.  v.  United  Shoe  Machinery  Co.  et  al.    Decided 

March  31,  1920.    264  Fed.  Rep.  138-175. 
U.  S.  Court  Decisions.    U.  S.  v.  E.  C.  Knight  Co.    Decided  January  21, 

1895.     156  U.  S.  1-46. 
U.   S.   Court    Decisions.     U.   S.  v.  Trans-Missouri    Freight    Association. 

Decided  March  22,  1897.    166  U.  S.  290-374. 
U.  S.  Court  Decisions.    U.  S.  v.  Joint  Traffic  Association.    Decided  October 

24, 1898.  171  u.  s.  505-578. 

U.  S.  Court  Decisions.  Hopkins  v.  U.  S.    Decided  October  24,  1898.     171 

U.    S.    578-604. 

U.  S.  Court  Decisions.  Anderson  v.  U.  S.     Decided  October  24,  1898.  171 

U.   S.    604-620. 

U.  S.  Court  Decisions.  Addyston  Pipe  and  Steel  Co.  v.  U.  S.     Decided 

December  4,  1899.  175  U.  S.  211-248. 

U.  S.  Court  Decisions.  Connolly  v.  Union  Sewer  Pipe  Co.    Decided  March 

10,  1902.    184  U.  S.  540-571. 


BIBLIOGRAPHY  579 

U.  S.  Court  Decisions.     Bement  v.  National  Harrow  Co.    Decided  May  19, 

1902.    186  U.  S.  70-95. 
U.  S.  Court  Decisions.     Montague  v.  Lowry.    Decided  February  23,  1904. 

193  U.  S.  38-48. 
U.  S.  Court  Decisions.     Northern  Securities  Co.  j;.  U.  S.     Decided  March 

14,  1904.    193  U.  S.  197-411. 
U.  S.  Court   Decisions.     Minnesota  v.  Northern   Securities  Co.     Decided 

April  II,  1904.    194  U.  S.  48-73- 
U.  S.  Court  Decisions.     Field  v.  Barber  Asphalt  Paving  Co.     Decided  May 

31,  1904.    194  U.  S.  618-626. 
U.  S.  Court  Decisions.     Svnit  and  Co.  v.  U.  S.     Decided  Januar>^  30,  1905. 

196  u.  s.  375-402. 

U.   S.   Court  Decisions.     National   Cotton    Oil    Co.  v.  Texas.     Decided 

February  27,  1905.    197  U.  S.  115-133. 
U.  S.  Court  Decisions.     Harriman  v.   Northern   Securities   Co.     Decided 

April  3,  1905.    197  U.  S.  244-299. 
U.  S.  Court  Decisions.      Chattanooga  Foundry  and  Pipe  Works  v.  City  of 

Atlanta.    Decided  December  3,  1906.    203  U.  S.  390-399. 
U.  S.  Court    Decisions.     Loewe  v.  Lawlor.     Decided    February  3,   1908. 

208   U.   S.    274-309. 
U.  S.  Court  Decisions.    Continental  Paper  Bag  Co.  v.  Eastern  Paper  Bag 

Co.    Decided  June  i,  1908.    210  U.  S.  405-430. 
U.  S.  Court  Decisions.     Continental  Wall  Paper  Co.  v.  Voight  and  Sons 

Co.    Decided  February  i,  1909.    212  U.  S.  227-274. 
U.  S.  Court  Decisions.     American  Banana  Co.  v.  United  Fruit  Co.      De- 
cided April  26,  1909.    213  U.  S.  347-359- 
U.  S.  Court  Decisions.     Dr.  Miles  Medical  Co.  v.  John  D.  Park  and  Sons 

Co.    Decided  April  3,  191 1.    220  U.  S.  373-413- 
U.  S.  Court  Decisions.     The    Standard   Oil  Co.  of  New  Jersey  et  al.  v. 

U.  S.    Decided  May  15,  1911.    221  U.  S.  1-106. 
U.  S.  Court  Decisions.      U.  S.  v.  American  Tobacco  Co.      American  To- 
bacco Co.  i).  U.  S.    Decided  May  29,  191 1.    221  U.  S.  106-193. 
U.S.    Court  Decisions.    Henry  v.  A.  B.  Dick  Co.    Decided  March  11,  19 12. 

224  U.  S.  1-73. 
U.  S.  Court  Decisions.    U.  S.  v.  St.  Louis  Terminal  Association.    Decided 

April  22,  191 2.    224  U.  S.  383-413. 
U.  S.  Court  Decisions.      Standard  Sanitary   Manufacturing  Co.  v.  U.  S. 

Decided  November  18,  1912.     226  U.  S.  20-52. 
U.  S.  Court  Decisions.      U.  S.  v.  Union  Pacific  Railroad  Co.      Decided 

December  2,  1912.    226  U.  S.  61-98. 
U.  S.  Court  Decisions.     U.  S.  v.  Reading  Company.    Decided  December 

16,  1912.    226  U.  S.  324-373. 
U.  S.  Court   Decisions.     U.   S.  v.   Union   Pacific  Railroad  Co.     Decided 

January  6,  1913.     226  U.  S.  470-477. 


58o  BIBLIOGRAPHY 

U.  S.  Court  Decisions.  U.  S.  v.  Patten.  Decided  January  6,  iqij-  226 
U.    S.    525-544. 

U.  S.  Court  Decisions.  U.  S.  v.  Winslow.  Decided  February  3,  1913. 
227  U.  S.  202-218. 

U.  S.  Court  Decisions.  Bauer  and  Cie  v.  O'Donnell.  Decided  May  26, 
1913.    229  U.  S.  1-18. 

U.  S.  Court  Decisions.  Straus  and  Straus  v.  American  Publishers'  Asso- 
ciation.   Decided  December  i,  1913.    231  U.  S.  222-237. 

U.  S.  Court  Decisions.  International  Harvester  Co.  of  America  v.  State 
of  Missouri.    Decided  June  8,  1914.    234  U.  S.  199-215. 

U.  S.  Court  Decisions.     The  Pipe  Line  Cases.     Decided  June  22,  1914. 

234  u.  s.  548-575- 

U.  S.  Court  Decisions.  Eastern  States  Retail  Lumber  Dealers'  Associa- 
tion V.  U.  S.    Decided  June  22,  1914.     234  U.  S.  600-614. 

U.  S.  Court  Decisions.  U.  S.  v.  Delaware,  Lackawanna  and  Western 
Railroad  Co.    Decided  June  21,  1915.    238  U.  S.  516-537. 

U.  S.  Court  Decisions.  Motion  Picture  Patents  Company  v.  Universal  Film 
Manufacturing  Company.     Decided  April  9,  1917.     243  U.  S.  502-521. 

U.  S.  Court  Decisions.  U.  S.  v.  United  Shoe  Machinery  Co.  of  New 
Jersey.    Decided  May  20,  1918.    247  U.  S.  32-91. 

U.  S.  Court  Decisions.  U.  S.  v.  United  States  Steel  Corporation.  De- 
cided March  i,  1920.    251  U.  S.  417-466. 

U.  S.  Court  Decisions.  U.  S.  v.  Reading  Company.  Reading  Company 
V.  U.  S.    Decided  April  26,  1920.    253  U.  S.  26-65. 

U.  S.  Court  Papers.  U.  S.  v.  Aluminum  Co.  of  America.  Petition.  In 
the  District  Court  of  the  United  States  for  the  Western  District  of 
Pennsylvania. 

U.  S.  Court  Papers.  U.  S.  v.  Aluminum  Co.  of  America.  Decree.  In  the 
District  Court  of  the  United  States  for  the  Western  District  of  Penn- 
sylvania. 

U.  S.  Court  Papers.  U.  S.  v.  American  Can  Co.  et  al.  Brief  for  the  United 
States.  In  the  District  Court  of  the  United  States  for  the  District 
of  Maryland.      No.    40. 

U.  S.  Court  Papers.  U.  S.  v.  American  Can  Co.  et  al.  Petitioner's  Sum- 
mary of  Evidence.  In  the  District  Court  of  the  United  States  for  the 
District  of  Maryland.     No.  40. 

U.  S.  Court  Papers.  U.  S.  v.  American  Can  Co.  Brief  for  the  American 
Can  Co.  In  the  District  Court  of  the  United  States  for  the  District 
of  Maryland.     No.  40. 

U.  S.  Court  Papers.  U.  S.  v.  American  Sugar  Refining  Co.  Petition.  In 
the  Circuit  Court  of  the  United  States  for  the  Southern  District  of 
New  York. 

U.  S.  Court  Papers.  U.  S.  v.  American  Tobacco  Co.  et  al.  Original  Pe- 
tition. In  the  Circuit  Court  of  the  United  States  for  the  Southern 
District  of  New  York. 


BIBLIOGRAPHY  •        581 

U.  S.  Court  Papers.  U.  S.  v.  American  Tobacco  Co.  et  al.  (no.  660),  and 
American  Tobacco  Co.  et  al.  v.  U.  S.  (no.  661).  Transcript  of  Record, 
in  five  volumes.  In  the  Supreme  Court  of  the  United  States,  October 
term,  1908. 

U.  S.  Court  Papers.  U.  S.  v.  American  Tobacco  Co.  et  al.  (no.  118),  and 
American  Tobacco  Co.  et  al.  v.  U.  S.  (no.  119).  Brief  for  the  United 
States.  In  the  Supreme  Court  of  the  United  States,  October  term, 
1910. 

U.  S.  Court  Papers.  U.  S.  v.  Corn  Products  Refining  Co.  et  al.  Govern- 
ment's Brief  on  the  Law  and  Facts.  In  the  District  Court  of  the  United 
States  for  the  Southern  District  of  New  York.    No.  E-10-122. 

U.  S.  Court  Papers.  U.  S.  v.  Corn  Products  Refining  Co.  Brief  for  the 
Corn  Products  Refining  Co.  In  the  District  Court  of  the  United  States 
for  the  Southern  District  of  New  York.    No.  10-122. 

U.  S.  Court  Papers.  U.  S.  v.  E.  I.  du  Pont  de  Nemours  and  Co.  et  al. 
Transcript  of  Record,  in  thirteen  volumes.  In  the  Circuit  Court  of 
the  United  States  for  the  District  of  Delaware.    No.  280. 

U.  S.  Court  Papers.  U.  S.  v.  E.  I.  du  Pont  de  Nemours  and  Co.  et  al.  Brief 
for  the  United  States,  in  two  volumes.  In  the  Circuit  Court  of  the 
United  States  for  the  District  of  Delaware.    No.  280. 

U.  S.  Court  Papers.  U.  S.  v.  E.  I.  du  Pont  de  Nemours  and  Co.  et  al.  Brief 
for  E.  I.  du  Pont  de  Nemours  and  Co.  and  various  others  defendants, 
with  Appendix  to  Brief.  In  the  Circuit  Court  of  the  United  States  for 
the  District  of  Delaware.    No.  280. 

U.  S.  Court  Papers.  U.  S.  v.  Eastman  Kodak  Co.  et  al.  Petition.  In 
the  District  Court  of  the  United  States  for  the  Western  District  of 
New  York. 

U.  S.  Court  Papers^  U.  S.  v.  General  Electric  Co.  et  al.  Petition.  In  the 
Circuit  Court  of  the  United  States  for  the  Northern  pistrict  of  Ohio. 

U.  S.  Court  Papers.  International  Harvester  Co.  of  New  Jersey  et  al.  v. 
U.  S.  Brief  for  the  United  States.  In  the  Supreme  Court  of  the  United 
States,  October  term,  1914.    No.  757. 

U.  S.  Court  Papers.  International  Harvester  Co.  of  New  Jersey  et  al.  v. 
U.  S.  Brief  for  the  International  Harvester  Co.  In  the  Supreme  Court 
of  the  United  States,  October  term,  1914.    No.  757. 

U.  S.  Court  Papers.  International  Harvester  Co.  v.  U.  S.  Brief  for  the 
United  States  (Reargument).  In  the  Supreme  Court  of  the  United 
States,  October  term,  1916.     No.  56. 

U.  S.  Court  Papers.  International  Harvester  Co.  v.  U.  S.  Reply  Brief 
for  the  International  Harvester  Co.  (Reargument).  In  the  Supreme 
Court  of  the  United  States,  October  term,  191 6.    No.  56. 

U.  S.  Court  Papers.  U.  S.  v.  International  Harvester  Co.  et  al.  Appendix 
to  Defendants'  Brief.  In  the  District  Court  of  the  United  States  for 
the  District  of  Minnesota.    No.  624. 

y.  S.  Court  Papers.     U.  S.  v.  The  Keystone  Watch  Case  Co.  Qt  al.     Brief 


582  BIBLIOGRAPHY 

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U.  S.  Court  Papers.     U.  S.  v.  The  Keystone  Watch  Case  Co.  et  al.    Brief 
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U.  S.  Court  Papers.  U.  S.  v.  Quaker  Oats  Co.  et  al.  Petitioner's  Sum- 
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U.  S.  Court  Papers.  U.  S.  v.  Quaker  Oats  Co.  et  al.  Brief  for  the  Quaker 
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U.  S.  Court  Papers.  U.  S.  v.  Standard  Oil  Co.  of  New  Jersey  and  others. 
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Eastern  Division  of  the  Eastern  Judicial  District  of  Missouri. 

U.  S.  Court  Papers.  U.  S.  v.  Standard  Oil  Co.  of  New  Jersey  and  others. 
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U.  S.  Court  Papers.  U.  S.  v.  Standard  Oil  Co.  of  New  Jersey  and  others. 
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the  Eastern  Judicial  District  of  Missouri.    No.  5371. 

U.  S.  Court  Papers.  U.  S.  v.  Standard  Oil  Co.  of  New  Jersey  and  others. 
Decree.  In  the  Circuit  Court  of  the  United  States  for  the  Eastern 
Division  of  the  Eastern  Judicial  District  of  Missouri.    No.  5371. 

U.  S.  Court  Papers.  Standard  Oil  Co.  v.  U.  S.  Brief  for  the  United  States. 
In  the  United  States  Circuit  Court  of  Appeals  for  the  7th  Circuit, 
October  term,  1907.    No.  1409. 

U.  S.  Court  Papers.  Standard  Oil  Co.  of  New  Jersey  et  al.  v.  U.  S.  Brief 
for  the  United  States,  in  two  volumes.  In  the  Supreme  Court  of  the 
United  States,  October  term,  1909.    No.  725. 

U.  S.  Court  Papers.  Standard  Oil  Co.  of  New  Jersey  et  al.  v.  U.  S.  Brief 
for  the  Standard  Oil  Co.,  in  two  volumes.  In  the  Supreme  Court  of 
the  United  States,  October  term,  1909.    No.  725. 

U.  S.  Court  Papers.  Standard  Oil  Co.  of  New  Jersey  et  al.  v.  U.  S.  Reply 
Brief  for  the  United  States.  In  the  Supreme  Court  of  the  United  States, 
October  term,  1910.    No.  398. 

U.  S.  Court  Papers.    U.  S.  v.  Swift  and  Co.  et  al.    Petition.    In  the  Circuit 


BIBLIOGRAPHY  ■      583 

Court  of  the  United  States  for  the  Northern   District  of  Illinois, 

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U.  S.  Court  Papers.     Swift  and  Co.  et  al.  v.  \J .  S.     Brief  for  the  United 

States.     In  the  Supreme  Court  of  the  United  States,  October  term, 

1904.    No.  103. 
U.  S.  Court  Papers.     U.  S.  v.  Swift  and  Company  et  al.    Decree  and  Con- 
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the  District  of  Columbia.    No.  37623. 
U.  S.  Court  Papers.    U.  S.  v.  United  Shoe  Machinery  Co.  et  al.    Original 

Petition.    In  the  District  Court  of  the  United  States  for  the  Eastern 

District  of  Missouri. 
U.  S.  Court  Papers.    U.  S.  v.  United  Shoe  Machinery  Co.    Brief  for  the 

United  States  (Reargument) .     In  the  Supreme  Court  of  the  United 

States,  October  term,  191 7.    No.  207. 
U.  S.  Court  Papers.     U.  S.  v.  United  States  Steel  Corporation  et  al.     Peti'. 

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Jersey. 
U.  S.  Court  Papers.    U.  S.  v.  United  States  Steel  Corporation  et  al.    Brief 

for  the  United  States,  in  two  parts.     In  the  District  Court  of  the  United 

States  for  the  District  of  New  Jersey,  October  term,  1914.    No.  6214. 
U.  S.  Court  Papers.     U.  S.  v.  United  States  Steel  Corporation.     Brief  for 

the  United  States,  in  two  volumes.    In  the  Supreme  Court  of  the  United 

States,  October  term,  1916.    No.  481. 
U.  S.  Court  Papers.     U.  S.  v.  United  States  Steel  Corporation.    Brief  for 

the  United  States  Steel  Corporation.     In  the  Supreme  Court  of  the 

United  States,  October  term,  1916.     No.  481. 
U.  S.  Department  of  Justice.     Annual  Reports  of  the  Attorney  General, 

1890  to  date. 
U.    S.  Federal  Trade  Commission.    Annual  Reports. 
U.  S.  Federal  Trade  Commission.     Farm  Machinery  Trade  Associations, 

March  15,  1915. 
U.  S.  Federal  Trade  Commission.      Report  on  Pipe-Line  Transportation 

of  Petroleum,  February  28,  1916. 
U.  S.  Federal   Trade    Commission.     Report   on    the  Fertilizer  Industry. 

August  19,  1916. 
U.  S.  Federal  Trade   Commission.    Report   on   the   Price  of  Gasoline  in 

1915,   April    II,    1917. 
U.  S.  Federal  Trade  Commission.     Report  on  the  Beet  Sugar  Industry  in 

the  United  States,  May  24,  1917. 
U.  S.  Federal  Trade  Commission.     Report  on  News-Print  Paper  Industry, 

June  13,  1917.     Senate  Document  no.  49,  6sth  Cong.,  ist  Sess. 
U.  S.  Federal  Trade  Commission.      Report  on  the  Book-Paper  Industry, 

August  21,  1917.    Senate  Document  no.  79,  6sth  Cong.,  ist  Sess. 
U.  S.    Federal  Trade  Commission.    Report  on  Flour  Milling  and  Jobbing, 

April  4,  1918. 


584  BIBLIOGRAPHY 

U.  S.  Federal  Trade  Commission.  Report  on  Canned  Foods,  General  Re* 
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U.  S.  Federal  Trade  Commission.  Report  on  Canned  Foods,  Canned  Sal- 
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U.  S.  Federal  Trade  Commission.  Report  on  the  Meat-Packing  Industry, 
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of  the  Five  Packers  in  ControlUng  the  Meat-Packing  Industry,  June 
28,  1919;  part  4,  The  Five  Larger  Packers  in  Produce  and  Grocery 
Foods,  June  30,  1919;  part  5,  Profits  of  the  Packers,  June  28,  1919;  part 
6,  Cost  of  Growing  Beef  Animals,  Cost  of  Fattening  Cattle,  Cost  of 
Marketing  Live  Stock,  June  30,  1919. 

U.  S.  Federal  Trade  Commission.  Report  on  Private  Car  Lines.  June 
27,    1919. 

U.  S.  Federal  Trade  Commission.  Decisions,  Findings,  Orders,  and  Con- 
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U.  S.  Federal  Trade  Commission.  Report  on  the  Causes  of  High  Prices 
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U.  S.  Industrial  Commission.  Report  of  the  Industrial  Commission,  vols. 
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U.  S.  Interstate  Commerce  Commission.  In  the  Matter  of  Divisions  of 
Joint  Rates  and  other  Allowances  to  Terminal  Railroads.  Decided 
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U.  S.  Interstate  Commerce  Commission.  Report  of  Investigation  in  re 
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Van  Hise,  C.  R.  Concentration  and  Control:  A  Solution  of  the  Trust 
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Virtue,  G.  O.  The  Meat-Packing  Investigation,  Quarterly  Journal  of 
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INDEX 


Acme  Harvesting  Machine  Co.,  246. 
Adamson,  Representative,  338. 
Addyston  Pipe  and  Steel  Co.,  12, 23, 395— 

3Q6. 
Addyston  Pipe  and  Steel  Co.  v.  United 

States,  326,  395-398,  442. 
Adriance,  Piatt  and  Co.,  246. 
Agricultural   implement.     See  Interna- 
tional Harvester  Co. 
Agricultural  organizations,  372-373. 
Aluminum   Company  of  America,    13, 

298,  490-492,  519,  539. 
Aluminum.     See  Aluminum   Company 

of  America. 
Amalgamated  Copper  Co.,  90,  377. 
American  Agricultural  Chemical  Co.,  4, 

Sis- 
American  Beet  Sugar  Co.,  104. 
American  Bicycle  Co.,  42-43,  190,  272, 

297,  S19.  S39- 
American  Bridge  Co.,  189,  195,  199-202, 

287. 
American  Can  Co.,  43,   272,   278-279, 

292,  445,  493,  497-498,  527-528,  539. 

548. 
American  Car  and  Foundry  Co.,  190. 
American  Chicle  Co.,  42,  519,  528,  539. 
American  Cigar  Co.,  132,  137,  150,  153, 

271,  291,414,456-457. 
American  Coal  Products  Co.,  43,   444, 

492. 
American  Cotton  Oil  Co.,  20-21,  23,  31, 

40. 
American  Cotton  Oil  trust.     See  Ameri- 
can Cotton  Oil  Co. 
American  Federation  of  Labor,  372. 
American  Hide  and  Leather  Co.,  42,  539. 
American  Iron  and  Steel  Manufacturing 

Co.,  190. 
American  Linseed  Co.,  42,  539. 
American  Malting  Co.,  40,  272,  296-297, 

539- 
American  Radiator  Co.,  190. 
American  Sheet  Steel  Co.,  42,  189,  193, 

195,  200,  202,  287. 
American  Smelting  and  Refining  Co., 

332,  504- 
American  Snuff  Co.,  42,  loo-ioi,  137, 


143,  150,  271,  291,  414,  452,  454-457, 

470. 
American  Steel  Hoop  Co.,  189,  193-195, 

199-200,  202,  287,  509,  522,  529. 
American  Steel  and  Wire  Co.,  41-42, 

189,  193-194,  198-200,  202,  263-264, 

287,  520-521,  528-529. 
American  Stogie  Co.,  414,  456-457. 
American  Sugar  Refining  Co.,  4,  22-24, 

36-37,  39-40,  92-122,  262-263,  272, 

298,  313-314,  332,  3S8,  442,  444,  493, 

497,  504-505,  508-510,  515,   519,527. 

537,  539-540,  548. 
American  Thread  Co.,  279,  444,  492,  528. 
American  Tin  Plate  Co.,  41-42,  189,  193, 

195,  19S-200,  202,  218,  263,  287,  500, 

504,521,523. 
American  Tobacco  Co.,  4,  13,  36,  40,  43- 

44,  123-163,  266-267,   270-271,  279, 

289-292,  348,  366,  386,  393,  413-419, 

444,  452-474.  494,  500-501,  503-504. 

510,  517-519,  523-524,  526-529,  537, 

540- 
American  Transfer  Co.,  53. 
American  Writing  Paper  Co.,  42,  539. 
Amsterdam  Supply  Co.,  150. 
Andrews,  Samuel,  47. 
Anthracite  coal  combination,  426-429. 
Anthracite  coal,  8-9,  11,  527,  529,  540. 

See  also  Anthracite  coal  combination. 
Arbuckle  Brothers,  96-98,  102,  109, 118- 

119,  521. 
Archbold,  John  D.,  19,  26,  446-447. 
Arkansas,  79,  447-448. 
Armour  and  Co.,  10,  403,  486. 
Ashland  Steel  Co.,  228. 
Asphalt  Company  of  America,  42-43, 

272,  297,  539. 
Asphalt.    See    Asphalt     Company    of 

America. 
Atlantic  Refining  Co.,  447,  449-450. 
Atlantic  Snuff  Co.,  130-13 1. 
Atlas  Powder  Co.,  474. 
Attorney  General,   113,  327,  329,  332, 

341,  346-349,  369,  371,  385,  391,  442- 

443,  451,  453,  460,  468-470,  479,  4S1, 

487-489,  493,  495-496,  498,  550. 
Aultmann-Miller  Co.,  237. 


587 


588 


INDEX 


Automobile,  3. 

Automobile  Bumper  Association,  402. 

Baking    powder.     See    Royal    Baking 

Powder  Co. 
Baltimore  and  Ohio  Railroad,  48,  53. 

Baltimore  Sugar  Refining  Co.,  93-94- 

Banks.     Sec  Financial  institutions. 

Bedford,  A.  C,  446-447. 

Beet  sugar.     See  Sugar. 

Belgium,  167,  237,  375. 

Bement  v.  National  Harrow  Co.,  398- 
399,  421,  426. 

Berglund,  Abraham,  186. 

Bessemer  Steamship  Co.,  196,  303. 

Bethlehem  Iron  Co.  See  Bethlehem 
Steel  Co. 

Bethlehem  Steel  Co.,  4,  187,  207,  219, 
224,  502,  526. 

B.  F.  Avery  and  Sons,  482. 

Bicycle,  492.  See  also  American  Bicy- 
cle Co. 

Biscuit,  41. 

Blackwell's  Durham  Tobacco  Co.,   128. 

Bogus  independents,  80-81,  151-154, 
237-238,  251,  416. 

Bonsack  Machine  Co.,  125. 

Borax,  539. 

Brady,  Anthony  N.,  128,  134. 

Brandeis,  Justice,  181-182,433,461-462, 
464,  466-467,  469. 

Brass,  6. 

Bread,  3. 

Brewer,  Justice,  407. 

Brick,  3,  41. 

Bridge.     See  Steel. 

British-.'\merican  Tobacco  Co.,  13,  136- 
137,  146,  414,  454,  456-457,  460. 

British  United  Shoe  Machinery  Co. 
See  United  Shoe  Machinery  Co. 

Bullock,  C.  J.,  499.  538. 

Bureau  of  Corporations,  44,  47,  49,  51. 
58-59,  62-66,  68-69,  73-75,  79-80,  86- 
87,  90,  123,  125,  138,  142,  147-149, 
153-154,  161,  163,  195,  197,  205,  208, 
211-212,  222-223,  232-234,  236,  238, 
240,  247,  252-253,  258,  261-262,  266- 
267,  270-271,  288-289,  294-295,  302, 
327-328,  330,  343-346,  348,  444,  470, 
472,  480,  540. 

Bureau  of  Internal  Revenue,  138,  156. 

Burroughs  Adding  Machine  Co.,  492. 

Butter,  3,  13,  305-306. 

By-products.  See  Utilization  of  by- 
products. 


Calcium  carbide,  13. 

California,  66,  73,  79,  93. 

California  and  Hawaiian  Sugar  Refining 
Co.,  96,  98,  100. 

California  Raisin  Association,  347. 

California  Sugar  Refinery,  93,  95. 

Cambria  Iron  Co.  See  Cambria  Steel 
Co. 

Cambria  Steel  Co.,  187,  207,  218,  221. 

Campbell,  President,  219. 

Canada,  134,  239. 

Cane  sugar.     See  Sugar. 

Carnegie,  Andrew,  188,  535. 

Carnegie  Company  of  New  Jersey,  41, 
187-194,  198,  200-202,  204,  216,  230, 
263,  286-287,  521,  535,540. 

Carnegie  Steel  Co.  See  Carnegie  Com- 
pany of  New  Jersey. 

Cartels,  375. 

Carter  Oil  Co.,  450. 

Cash  register,  3,  442.  See  also  National 
Cash  Register  Co. 

Cast  iron  pipe,  12,  443.  See  also  Addy- 
ston  Pipe  and  Steel  Co.,  and  United 
States  Cast-Iron  Pipe  and  Foundry 
Co. 

Central  Association  of  Refiners,  52. 

Central  Ohio  Salt  Co.  v.  Guthrie,  304. 

Central  Railroad  of  New  Jersey,  427, 
429. 

Central  Shade-Roller  Co.  v.  Cushman, 
310-311. 

Central  West  Publishing  Co.,  492. 

Champion  Construction  Co.,  100-101. 

Chapin  v.  Brown  Brothers,  305. 

Cheese,  3. 

Chemical  Foundation,  511. 

Chewing  gum.    See  American  Chicle  Co. 

Chicago  and  Eastern  Illinois  Railroad, 
74- 

Chicago,  Lake  Shore  and  Eastern  Rail- 
way, 192. 

Chicago,  Rock  Island  and  Pacific  Rail- 
way, 338. 

Chicago,  West  Pullman  and  Southern 
Railway,  235,  253. 

Cigar.    See  Tobacco. 

Cigarettes.    See  Tobacco. 

Cigar  Manufacturers'  Association,  462. 

Clairton  Steel  Co.,  209. 

Clapp,  Senator,  332. 

Clark,  J.  B.,  535- 

Clarke,  Justice,  166,  434. 

Clayton  Act,  175, 338,  341-342. 3S7-373i 
380,  384, 422,  476. 


INDEX 


589 


Clayton,  Representative,  338,  sss. 
Cleveland,  Grover,  322-323,  442-443. 
Coal,  3,  303,  307,  329. 
Coke.    See  Steel. 
Collateral  competition,  278. 
Colonial  Sugars  Co.,  100,  102. 
Colorado,  78. 
Colorado  Fuel  and  Iron  Co.,  186-187, 

207. 
Columbia  Conduit  Co.,  54. 
Combination,  2-4,  6,  38-41,  43, 186, 189. 

See  also  Horizontal  combination  and 

Vertical  combination. 
Commerce  Court,  69. 
Commercial  Travelers'  National  League, 

520. 
Commissioner     of     Corporations.     See 

Bureau  of  Corporations. 
Commodity  clause,  72,  223,  336,  451. 
Common  carriers,  68,  220,  338,  344,  350, 

357,  363-364,  367,  370,  3Q2,  401,  500, 

505-506,  548,  550,  553,  555,  558. 
Common  law  decisions,  17,  24-25,  300- 

317. 
Conant,  Luther,  39, 43. 
Conley  Foil  Co.,  145,  414,  454,  456. 
Consent  decrees,  347,  368,  445,  477,  490- 

492,  497. 
Consolidated  and  McKay  Lasting  Mach- 
ine Co.,  164-165,  431. 
Consolidated  Gas  Co.,  90. 
Consolidated  Steel  and  Wire  Co.,  188. 
Consolidated  Tobacco  Co.,  36,  43,  45, 

133-137,  163,291,414. 
Consolidation,    32-34,    123,    165,    186, 

230.    See  also  Property  owning  cor- 
poration. 
Continental  Oil  Co.,  447,  450. 
Continental  Tobacco  Co.,  36,42-43, 127- 

133,  136,  142,  157-158,  161,  163,  271, 

290-291. 
Continental  Wall  Paper  Co.,  14-15. 
Copper,  8,  377. 
Cordage,  6,  22,  502.     See  also  National 

Cordage  Co. 
Corey,  President,  219. 
Corn  Products  Co.     See  Corn  Products 

Refining  Co. 
Corn  Products  Refining  Co.,  43,  90,  272, 

388,  436-437,  444,  484-485,  495,  4Q8, 

502,519,  537,  539-540. 
Corner,  8,  429-430. 
Cotton  bagging,  8. 
Cotton    duck.    See    Mount    Vemon- 

Woodberry  Cotton  Duck  Co. 


Cotton  seed  oil,  311-312,  317.    See  also 

American  Cotton  Oil  Co. 
Cotton  yarn.     5et' New  England  Cotton 

Yarn  Co. 
Court  decisions,  2-3,  13,  23,  44-45,  69, 

113,  168,  317,  388-440,  469,  477,  481, 

485,  543,  551.     See  also  Common  law 

decisions. 
Court  review,  354,  549-550. 
Covington,     Representative,     338-339, 

352-352. 
Cream,  13. 
Cross  freights,  3,  62,  205,  509,  517,  528- 

529. 
Crucible  Steel  Company  of  America,  190. 
Cuba,  13,  102,  no,  144,  222,  224. 
Cuban-American  Sugar  Co.,  102. 
Cudahy  Packing  Co.,  10,  403,  486. 
Cudahy  Refining  Co.,  448. 
Cummins,  Senator,  352,  364. 
Cunningham  Sugar  Refining   Co.,    100, 

102. 

Davey  Pegging  Machine  Co.,  165. 
Day,  Justice,  422,  426,  434,  440. 
Deere  and  Co.,  246-247. 
Deering  Harvester  Co.,   231,   233-234, 

238,  240,  249-250,  294,  525,  540. 
Deering,  Mr.,  512. 
Delaware,  31,  78-79,  447. 
Delaware  Sugar  House,  93,  95. 
Democratic  party,  319,  323,  325,  333, 

335- 
Department  of  Commerce  and  Labor, 

327,  329-330,  344- 
Department  of  Justice,  267,  329,  331, 

345-349,  354,  369-370,  441,  443-444, 

470,  474,  480-482,  484,  486. 
Dewing,  A.  S.,  522. 
DeWitt  Wire-Cloth  Co.  v.  New  Jersey 

Wire-Cloth  Co.,  305. 
Diamond,  539. 

Diamond  Match  Co.,  40,  315-316. 
Dick  Co.,  A.  B.     See  Henry  v.  A.  B. 

Dick  Co. 
Dissolution  proceedings,  24-26,  106,218, 

224,  240,  254,  257,  330,  336,  348-349, 

365-366,  403,  411-412,  418,  424,  426, 

435,  437-438,  441-499.  518,  542,  560, 

562-563. 
Distillers  and  Cattle  Feeders'  "trust". 

See    Distilling    and    Cattle    Feeding 

Co. 
Distillers  Securities  Corporation,  43. 
Distilling  and  Cattle  Feeding  Co.,  21, 


59° 


INDEX 


39-40,  268,  272,  312-313,  316-317, 

441,  502,  504,  S19-521,  528,  539. 
Distilling   and    Cattle  Feeding   Co.   v. 

People,  316-317. 
Dividends,  88-90,   119-122,    134,   184- 

185,  212-213,  240,  258-259,  271,  289, 

295- 

D.  M.  Osborne  and  Co.,  237-238,  240, 
244-245,251. 

Dodge,  Judge,  183. 

Dolph  V.  Troy  Laundry  Machinery  Co., 
309-310. 

Donner,  President,  218. 

Doscher,  Claus,  96,  118-119. 

Dowe,  Mr.,  520-521. 

Drummond  Tobacco  Co.,  138-139. 

Duke,  James  B.,  124,  126, 128, 134. 

Duke,  Sons  and  Co.,  W.  See  W.  Duke, 
Sons  and  Co. 

Duluth  and  Iron  Range  Railroad,  192, 
223. 

Duluth,  Missabe  and  Northern  Rail- 
road, 196,  223. 

Dumping,  360,  523-525. 

Dunbar,  D.E.,  186. 

Duncan,  C.  S.,  374. 

Duplex  Printing  Press  Co.  case,  371. 

Du  Pont  de  Nemours  Powder  Co.  See 
E.  I.  du  Pont  de  Nemours  Powder  Co. 

Durand,  E.  Dana,  :iZ3i,  49Q- 

Earnings,  87-90, 121, 154, 159-163,  184- 
185,  210-213,  257-259,  265-268,  289, 

295- 
Eastman  Kodak  Co.,  43,  445,  493.  495, 
504,  519,  539- 

E.  C.  Knight  Co.,  93-95,  388-391- 
Economies  of  the  trust  form  of  organ- 
ization, 62-65,  94,  108-110,  116,  146- 
150,  182,  198,  204-205,  218-220,  234, 
250-251,  260,  269,  276,  499-541,  543, 
562. 

E.  I.  du  Pont  de  Nemours  Powder  Co., 
43,  298,  386,  444,  474-475.  497,  519, 
527,  537,  539-540. 

Electrical  supplies,  15.  See  also  Gen- 
eral Electric  Co. 

Elevator,  444.  See  also  Otis  Elevator 
Co. 

Elgin,  Joliet  and  Eastern  Railway,  192. 

Elkins  Act,  328. 

Ely,  R.T.,499. 

Emerson-Brantingham  Co.,  246,  4S2. 

Empire  Steel  and  Iron  Co.,  41,  190. 

Empire  Transportation  Co.,  53. 


Enameled  iron  ware,  15,  424-425.  See 
also  Standard  Sanitary  Manufactur- 
ing Co. 

Envelope.  See  United  States  Envelope 
Co. 

Eppler  Welt  Machine  Co.,  165. 

Erie  Railroad,  48-49,  53,  427,  429. 

Esch-Cummins  Act,  553,  555. 

Espionage,  50,  81,  331,  467-468,  563. 

European  war,  338,  379. 

Expedition  Act,  326-328,  330,  444. 

Export  trade,  59, 134, 140, 145-146,  205, 
235,  237,  239,  242,  244,  374-387,  485, 
517,  522-528. 

Factor's  agreements,  114,  152,  504,  563. 

Farrell,  President,  219,  524. 

Federal  incorporation,  330,  563-564. 

Federal  license,  564. 

Federal  Reserve  Act,  335,  371. 

Federal  Reserve  Board,  366-367,  369. 

Federal  Steel  Co.,  41,  189,  191-193,  195, 
198-202,  263,  287. 

Federal  Sugar  Refining  Co.,  100,  102. 

Federal  Trade  Commission,  69-70,  72, 
245,  334,  336,  339,  343-357,  359-361, 
366-367,  369,  378-381,  384-386,  437, 
447,  449-451,  483,  490,  494,  496-497, 
542,  550. 

Fertilizer,  41.  See  also  American  Agri- 
cultural Chemical  Co. 

Field,  Justice,  393,  395- 

Financial  institutions,  90,  181-182,  344, 
350,364,367,  500,  505- 

Fine-cut  tobacco.    See  Tobacco. 

Flagler,  H.  M.,  19,51. 

Flint,  Mr.,  521,  533. 

Folger,  H.  C.  Jr.,  446. 

Food  Administration,  555. 

Foreign  trade.  See  Export  trade. 

France,  112,  167,  239. 

Franklin  Sugar  Refining  Co.,  93-95- 

French  Copper  Syndicate,  8. 

Frick  Coke  Co.,  188,  190. 

Fruit,  3. 

Fuel  Administration,  555. 

Garfield,  James  R.,  220. 

Gary  dinners,  225-229,  265,  386. 

Gary,  Judge  E.  H.,  219,  222,  226,  228- 
229. 

Gasoline.    See  Oil. 

Gates,  Mr.,  264. 

General  Asphalt  Co.  See  Asphalt  Com- 
pany of  America. 


INDEX 


591 


General  Electric  Co.,  15,  378,  444,  492- 

General  Paper  Co.,  445. 

Gentlemen's  agreement,  7. 

George,  Senator,  319. 

George  W.  Helme  Co.,  131,  454.  4S6- 
457,  470. 

Germany,  112,  134,  167,  239,  374-375- 

G.  H.  Hammond  Co.,  404. 

Gilmore,  Mr.,  109, 119. 

Glass  bottle,  13- 

Glass  table  ware,  298. 

Glessner,  Mr.,  232. 

Glucose,  44,  437.  See  alsc  Corn  Pro- 
ducts Refining  Co. 

Glucose  Sugar  Refining  Co.,  40,  272,  296. 

Golden  Belt  Manufacturing  Co.,  145. 

Gompers,  Samuel,  372. 

Goodnow,  Frank.  J.,  300. 

Goodyear  Shoe  Machinery  Co.,  164-165, 

431- 
Government     ownership.     See     Public 

ownership. 
Grain  binder.     See  Harvester. 
Grand  Trunk  Railroad,  48. 
Gray,  Justice,  393,  395,  398. 
Great  Britain,  13,    135-136,   167,  375- 

377,392,  416. 
Great  Northern  Paper  Co.,  539. 
Great  Northern  Railway,  223,  399-400, 

403- 
Gregory,  Attorney  General,  366. 
Grosscup,  Judge,  413. 
Gulf  Refining  Co.,  448. 
Gunpowder,  3,  12-13,  44.    See  also  E. 

I.  du  Pont  de  Nemours  Powder  Co. 

Hadley,  A.  T.,  531- 

Hammond  and  Co.,  10. 

Hammond  Packing  Co.,  403. 

Haney,  L.  H.,  542. 

Hard  wick.  Representative,  332. 

Harlan,  Justice,  318,  390-391,  398,  412- 

413,  418-419,  422,  452. 
Harriman  v.  Northern   Securities  Co., 

403- 
Harrison,  Benjamin,  320,  441-442. 
Harvester,    3,    44,    231-259.    See   also 

International  Harvester  Co. 
Havana-American  Tobacco  Co.,  132. 
Havemeyer,  Horace,  99,  107. 
Havemeyer,  H.  O.,  i,  93,  98-99,  io3,  io5, 

107-108,     112,     114-116,    n8,    120, 

509- 
Havemeyer,  T.  A.,  93. 
Havemeyers  and  Elder,  93-94. 97- 


Hawaii,  13,  382. 

Helme  Co.,  George  W.  See  George  W. 
Helme  Co. 

Henry,  Sidney,  420. 

Henry  v.  A.  B.  Dick  Co.,  361-362,  419- 
422. 

Hepburn  Act,  6S-69. 

Hercules  Powder  Co.,  474. 

Hernsheim  Brothers,  138. 

Holding  company,  20,  27-31,  34-38,  42, 
44-45,  57,  93,  98,  I33,  136,  202,  330, 
333,  357,  363-364,  366,  399-400,  403, 
406.  See  also  Security  holding  cor- 
poration. 

Holland,  237,  375. 

Holmes,  Justice,  400,  422,  431. 

Hook,  Judge,  435. 

Hopkins  v.  United  States,  394,  410. 

Horizontal  combination,  3-4,  198. 

Horticultural  organizations,  372. 

House  of  Representatives,  319,  325-326, 
329,  331-332,  338-342,  352,  359,  361, 
365-366,  370,  380-383,  385,  470. 

Hubbard  v.  Miller,  301. 

Hughes,  Justice,  422,  426. 

Ice,  41. 

Icecream,  3. 

lUinois  Northern  Railway,  235,  253. 

Illinois  Steel  Co.,  186-187,  192,  230. 

Immunity  bath  decision,  326,  485. 

Imperial  Tobacco  Co.,  13,  135-136,  414, 

456. 
Imports,  145-146. 

Independent  Tobacco  Salesmen's  Asso- 
ciation, 462. 
India  Bagging  Association  v.  B.  Kock, 

302-303. 
Indian  Refining  Co.,  448. 
Industrial  Commission,  120,  324,  525. 
Industrial  railways,  234-235,  253-254. 
Injunction,  370-371,  455,  458-460,  467- 

468,  478-479,  484-485,  487-489,  491- 

492,  494- 
Integration  of  industry.     See  Vertical 

combination. 
Interlocking  directorates,  217,  333,  336, 

338,  357,  364-366. 
Internal  revenue  ta.xes,  158-159. 
International  Eppler  Welt  Machine  Co., 

165. 
International  Goodyear  Shoe  Machinery 

Co.,  165. 
International  Harvester  Co.,  4,  43,  230- 

259,  267,  273,  293-296,  375,  378,  38S, 


592 


INDEX 


435-436,  444,  479-483.  494.  497-498, 

512,520,523-527,529,540. 
International  Harvester  Co.  of  America. 

See  International  Harvester  Co. 
International  Harvester  Corporation. 

See  International  Harvester  Co. 
International  Nickel  Co.,  43. 
International  Paper  Co.,  42,  272,  2g8- 

299,  539,  549-550. 
International    Salt    Co.    See    National 

Salt  Co. 
International  Silver  Co.,  42,  297,  502, 

519,  521,  528-529,539. 
International  Steam  Pump  Co.,  190. 
Interstate  Commerce  Commission,  68- 

69,  223,  253,  328-330,  334.  336,  338, 

350,  354.  366-367,  369,  542,  551,  554, 

558-559,  565- 
Invention,  171,  178-183,512-513. 
Ireland,  135,  167. 
Iron.     See  Steel. 
Iron  ore.    See  Steel. 
Italy,  167,  375- 

Jacobstein,  Meyer,  123. 

Japan,  134,  375- 

Jarvie,  Mr.,  97,  109. 

Jenks,  J.  W.,  268,  499,  514. 

Jobbers.     See  Wholesalers. 

Johnson  Co.,  192. 

Johnston  Harvester  Co.,  246. 

Johnston  Tin  Foil  and  Metal  Co.,  145, 

454- 
Joint  cost,  547-548. 
Jones  and  Laughlin,  41,  187,  207,  216, 

228,  516. 
Jones,  Charles  H.,  176-177,  180. 
Jones,  Mr.,  of  Piano  Manufacturing  Co., 

232. 
J.  P.  Morgan  and  Co.,   192,   194-195, 

201-202,  251,  288,  294-295. 
J.  S.Young  Co.,  454. 
Judicial  interpretation.      See  Court  de- 


Kales,  Mr.,  4. 

Kansas,  23. 

Kansas  City  Live  Stock  Exchange,  443. 

Kentucky  Tobacco  Product  Co.,  145. 

Kerosene.     See  Oil. 

Keystone  Co.,  237-238. 

Keystone  Watch  Case  Co.,  444,  493, 

519.  528. 
Kissel,  G.  E.,  loi. 


Knauth,  O.  W.,  318,  513- 

Knight  Co.,  E.C.     5eeE.  C.  Knight  Co. 

Labor  organizations.    See  Trade  unions. 
Labor,  109,  357.  371-373.  5oo,  504.     See 

also  Trade  unions. 
Lackawanna  Iron  and  Steel  Co.,  186- 

187,  207. 
Lacombe,  Judge,  467. 

Lake  Superior  Consolidated  Iron  Mines, 

188,  191,  196,  202,  206. 
Lamar,  Justice,  422. 

Laurel  Run  Improvement  Co.,  29. 

Leaf  tobacco.     See  Tobacco. 

Leases,  171-178,  223-224,  431-434,  476. 

Leather.  See  United  States  Leather  Co. 
and  American  Hide  and  Leather  Co. 

Lehigh  Valley  Railroad,  445. 

Levy,  Felix  H.,  462,  467. 

Licorice  paste,  144-145,  153.  444.  466. 
See  also  MacAndrews  and  Forbes  Co. 

Liggett  and  Myers  Tobacco  Co.,  127- 
129,  138-139,  142,  158,  266,  271,  291, 
454-455,  458,  465-466,  470-472. 

Linseed  oil.     See  American  Linseed  Co. 

Little  cigars.     See  Tobacco. 

Lloyd,  H.  D.,  46. 

Local  price  discrimination,  65,  67,  77-83, 
100,  103,  114,  151,  153,  220-221,  253, 
277,  330.  333-334,  357-360,  366,  563. 

Loewe  v.  Lawlor,  405-406. 

Lorain  Steel  Co.,  192. 

Lorillard,  P.     See  P.  Lorillard. 

Louisiana,  23,  66. 

Lumber,  329. 

Lurton,  Justice,  431. 

L.  Wolff  Manufacturing  Co.,  425. 

MacAndrews  and  Forbes  Co.,  145,  414, 

454,  456,  465- 
Magnolia  Petroleum  Co.,  447-448,  450. 
Maine,  23,  31. 
Mallory    v.    Hanaur   Oil-Works,  311- 

312. 
Malt.    See  American  Malting  Co. 
Manhattan  Briar  Pipe  Co.,  145. 
Mann,  James  R.,  326,  340. 
Mann-Elkins  Act,  331. 
Margins,  84-87,  95,  97,  116-119,  262- 

263,  267-268,  555-557- 
Maryland  Steel  Co.,  187. 
Massachusetts,  177-178. 
Match,  317.     See  also  Diamond  Match 

Co. 
McCahan   Sugar   Refining   Co.,   W.  J 


INDEX 


593 


See  W.  J.  McCahan  Sugar  Refining 

Co. 
McCormick    Harvesting  Machine  Co., 

231,  233-235,  238,  240,  249-250,  294, 

525.  540. 
McElwain,  Mr.,  178. 
McKay  Shoe  Machinery  Co.,  164-165, 

431- 
McKeesport  Tin  Plate  Co.,  227. 
McKenna,  Justice,  395. 
McKinley,  William,  324,  443. 
McReynolds,  Attorney  General,  366,433. 
McVey,  Frank  L.,  186. 
Meade,  E.  S.,  28,  186. 
Meat-packing,  3,  lo-ii,  13,  44,  273,  278- 

279,  403-405,  444,  485-490,  497-498, 

514-515- 
Mengel  Box  Co.,  145. 
Merger.     See  Consolidation. 
Michigan,  14,  23. 
Michigan  Salt  Association,  14. 
Mill,  John  Stuart,  535. 
Milwaukee  Harvester  Co.,  231,  233,  238, 

241,  293-295. 
Minnesota  Iron  Co.,  188,  192. 
Minnie  Harvester  Co.,  237. 
Missouri,  237,  241-242. 
Mitchell  V.  Reynolds,  301. 
MoUenhauer  Sugar  Refining  Co.,  95,  98- 

99. 
Moody,  John,  43. 
Moody,  Justice,  407. 
Monopoly  price,  theory  of,  274-276. 
Montague,  G.  H.,  46,  333,  499,  504. 
Moore  and  Schley,  290. 
Moore,  Judge  W.  H.,  193,  202,  270. 
More  V.  Bennett,  306. 
Morgan  and  Co.,  J.  P.     See  J.  P.  Mor- 
gan and  Co. 
"Morris  and  Co.,  10,  403,  486. 
Morris  Run  Coal  Co.  v.  Barclay  Coal 

Co.,  303. 
Motion  Picture  Patents  Company  case, 

422. 
Mott  Iron  Works,  425. 
Mount  Vernon- Woodberry  Cotton  Duck 

Co.,  42,  272,  298,  539. 
Murdock,  Representative,  339. 

Nail.     See  Steel. 

Nash,  Spaulding  and  Co.     See  Revere 

Sugar  Refining  Co. 
National  Cash  Register  Co.,  279,  298, 

378,  444,  477-479.  497-498,  515-516, 

527,  529,  540- 


National  Cigar  Leaf  Tobacco  Associa- 
tion, 462. 
National   Cigarette  and  Tobacco  Co., 

128. 
National     Cordage     .Association.     See 

National  Starch  Co. 
National  Cordage  Co.,  22,  38,  40,  272, 

298,  53Q. 
National  Cotton  Oil  v.  Texas,  2. 
National  Enameling  and  Stamping  Co., 

190. 
National  Foreign  Trade  Council,  379. 
National  Glass  Co.,  42. 
National  Harrow  Co.,  398. 
National  Lead  "trust",  22. 
National  legislation,  317-387,  422,  562. 
National  Linseed  Oil  "trust",  20; 
National  Packing  Co.,  44,  486. 
National  Refining  Co.,  448. 
National  Salt  Co.,    42,    272,   298,   510, 

527-528,  539. 
National  Shear  Co.,  42,  272,  539. 
National  Starch  Co.,  40,  272,  296,  484, 

519,527,537,  539- 
National    Starch    Manufacturing    Co. 

See  National  Starch  Co. 
National  Steel  Co.,  41,   189,   192-193, 

198-200,  202,  263,  287. 
National  Sugar  Refining  Co.,  96,  98-99, 

107-108,  119. 
National  Tobacco  Works,  126,  141. 
National  Transit  Co.,  55. 
National  Tube  Co.,  41-42,  189,  194-195, 

198-202,  263-264,  287. 
National  Wall  Paper  Co.,  40,  298,   503- 

504,  519,  521,  539. 
Natural  resources,   167,  224,   254,  277, 

279,  536,  539-540,  563- 
Nebraska,  23. 
Nebraska.    State  v.  Nebraska  Distilling 

Co.,  312-313. 
Nelson,  Senator,  330. 
Neuhausen  Co.,  491. 
New  Departure  Manufacturing  Co.,  492. 
New  England  Cotton  Yarn  Co.,  42,  272, 

279,  297-298,  503-504,  539- 
New  Jersey,  30-31,  35-36,  40,  43,  56,  92, 

96,  99,  123,  127,  130,  132,  153,  165, 

202,  231,  240,  447. 
New  Mexico,  80,  224,  237. 
New  York,  23-24,  27,  31,  92,  224,  231, 

319,  447- 
New  York  Central  Railroad,  48-49,  51, 

53- 
New  York  Glucose  Co.,  540-541. 


594 


INDEX 


New  York,  New  Haven  and  Hartford 

Railroad,  338,  444-445. 
New  York  Sugar  Refining  Co.,  q6,  gS. 
New  York,  .Susquehanna  and  Western 

Railroad,  427,  42Q. 
New  York  v.  North  River  Sugar  Refin- 
ing Co.,  313-314. 
New  York  v.  The  Milk  E.xchange,  306- 

307. 
New    York,    Wyoming    and    Western 

Railroad,  427-428. 
News  print  paper.     See  International 

Paper  Co. 
News-Print  Manufacturers'  Association 

492. 
Nickel.     See  International  Nickel  Co. 
North  Carolina,  23,  447. 
North  River  Sugar  Refining  Co.,    24, 

313-314- 
Northern  Pacific  Railway,  309-400,  403. 
Northern  Securities  Co.,  136,  399-400, 

402-403,  444. 
Northern     Securities     Co.    v.     United 

States,  44,  136,  399-403,  463. 
Notz,  William,  374. 
Novelty  Candy  Co.,  484. 

Oatmeal.     See  Quaker  Oats  Co. 

Ogden's  (Ltd),  135. 

Ohio,  24,  27,  42,  SI,  56,  71,  73-75.  79, 

314- 
Ohio.    State  v.  Standard  Oil  Co. 
Oil,  3,  46-91,  220,  317,  329.     See  also 

Standard  Oil  Co. 
Oklahoma,  447-448. 
Oliver  Iron  Mining  Co.,  188,  191. 
Oregon,  79. 
Osborne  and  Co.,  D.  M.     See  D.  M. 

Osborne  and  Co. 
Otis  Elevator  Co.,  42,  190,  445,  492. 
Ownership  of  raw  material,  60-61,  no, 

143-144,  167,  219,  222-224,  254,  491. 
Overcapitalization,  16,  89,  120-12 1,  134, 

161,  163,  202,  207-210,  236-237,  258, 

265,  268-273,  289-290,  293,  330,  333, 

439,   552. 
Oxnard,  Mr.,  121. 

Palmer,  L.  M.,  99,  103. 
Panama  Canal  Act,  332. 
Paper  bag,  539. 

Paper,  329,  347,  444.    See  also  Inter- 
national Paper  Co. 
Parsons,  J.  E.,  99. 
Patent  trusts,  168-169,  171,  279,  476. 


Patents,  15,  loi,  124-125,  132,  141,  145, 
150-151,  153,  168-169,  171,  176,  179- 
180,  254,  277,  398-399,  419-422,  424- 
426,  432-435,  490,  506,  510-512,  536, 
539,  563- 

Patten,  J.  A.,  429. 

Patterson  v.  United  States,  2. 

Pauline,  565. 

Payne,  O.  H.,  134. 

Pennsylvania,  46,  50-54,  71,  73-7S, 
447- 

Pennsylvania  Coal  Co.,  427,  429. 

Pennsylvania  Co.,  29. 

Pennsylvania  Railroad  Co.,  29,  48-49, 
53-54- 

Pennsylvania  Steel  Co.,  1S7,  207. 

Pennsylvania  Sugar  Refining  Co.,  100- 

lOI. 

Percentage  contracts,  427-429. 
Personal  guilt,  337,  369-370. 
Philadelphia  and  Reading  Railway,  29, 

426. 
Philippine  Islands,  13,  357,  381-382. 
Photographic     camera.     See     Eastman 

Kodak  Co. 
Pig  iron.     See  Steel. 
Pipe-lines,  52-55,  61,  65-72,  86,  219- 

220,  451. 
Pitney,  Justice,  426,  434. 
Pittsburg,  Bessemer  and  Lake  Erie  Rail- 
road, 191. 
Pittsburg  Plate  Glass  Co.,  273,  504. 
Piano  Manufacturing  Co.,  2^1-2^3,  235, 

238,  294. 
Plant,  Thomas  G.,  180-183. 
Plate  glass.     See  Pittsburg  Plate  Glass 

Co. 
P.  Lorillard,  127,  130,  454,  458,  466,  470. 
Plug  tobacco.     See  Tobacco. 
Plymouth  Cordage  Co.,  526. 
Pomerene,  Senator,  380-381. 
Pools,  I,  6-18,  21,  23,  27,  52,  1S7-189, 

193,  198,  225,  229,  232,  302-311,  395- 

396,  438-439,  485- 
Pope  Manufacturing  Co.,  43. 
Porto    Rican-American    Tobacco    Co., 

454,  457- 
Porto  Rico,  13,  144,382. 
Post,  J.  H.,  99. 

Potential  competition,  276-277,  355. 
Powder.     See   Gunpowder. 
Prairie  Oil  and  Gas  Co.,  450. 
Prairie  Pipe  Line  Co.,  450. 
Premiums,  67. 
Pressed  Steel  Car  Co.,  190. 


INDEX 


595 


Price  discnmination.    See  Local  price 

discrimination. 
Prices,  7,  9-12,  IS,  17,  77-87.  95.  97,  100. 

116-119,  154-161,  196-197,  203,  225- 

230,  254-257,  259-282,  289,  293,  382- 

383,  386,  439,  472-475,  562. 
Production  costs,  62-65,  147-149,  204, 

248-251.     ^ce  also  Economies. 
Profits.     See  Earnings. 
Progressive  party,  334-335- 
Promoters'  profit,  98,  193-196, 199,  202, 

204,  235-236,  260,  2S3-299,  562. 
Property  owning  corporation,  27,  31-  38, 

44-45,  93.     See  also  Consolidation. 
Public  ownership,    279,    556,    558-561, 

565- 
Pujo,  Representative,  332. 
Pure  Oil  Co.,  448. 

Quaker  Oats  Co.,  445. 

Radiator.     See  American  Radiator  Co. 

Railroad  discriminations.  See  Rail- 
road rebates. 

Railroad  Labor  Board,  555. 

Railroad  rebates,  48-49,  51,  53-54,  65- 
66,  72-77,  103, 114-115,  145, 167,  2ig- 
220,  253,  277,  328-329,  334,  404,  540, 

563- 
Railroad  Securities  Bill,  337-338. 
Railroads.     See  Common  carriers. 
Raymond  v.  Leavitt,  304-305. 
Reading  Co.,  426-427,  429,  444-445. 
Reading  Co.  v.  United  States,  426-429. 
Reed,  Senator,  342. 
Regulation  of  prices,  279,  282,  334,  339, 

542-561,  565. 
Regulation  of  profits,  542,  552-553. 
Republic  Iron  and  Steel  Co.,  41,  190, 

207,  210. 
Republic  Oil  Co.,  81. 
Republican  party,   318,   323-324,   328, 

333,  Sis- 
Restrictive   covenants,    114,    126,    137, 

417,  455-456. 
Retailers,  82,84,  97,  i53,  252-253,  261, 

501,  503-504- 
Retailers'  associations,  7. 
Revere  Sugar  Refining  Co.,  93,  95,  102. 
Reynolds  Tobacco  Co.,  R.  J.      See  R. 

J.  Reynolds  Tobacco  Co. 
R.  H.  Long  Machinery  Co.,  175. 
Richardson  v.  Buhl,  315-316. 
R.  J.  Reynolds  Tobacco  Co.,  142,  454. 

457-458,  470. 


Rockefeller,  John  D.,  19,  46-47,  51-52, 

54,  188,  199,  202,  251,  446. 
Rockefeller,  William,  ig,  47,  446. 
Roe,  Richard,  164. 
Roosevelt,  Theodore,  253,  327-329,  334" 

335,  443-444- 
Rope,  22.    See  also  National  Cordage 

Co. 
Royal  Baking  Powder  Co.,  520. 
Royalty,   171,   174,   176,   183-184,   223, 

511- 
Rubber    boot    and    shoe.     See    United 

States  Rubber  Co. 
Rubber  Goods  Manufacturing  Co.,  272, 

296,  522. 
Ruinous  competition,  124,  127,  197,  232- 

234,  260,  355,  416,  542,  562. 
Rule  of  reason,  392,  394,  408-412,  419, 

422,  424. 
Russia,  112,  167,  239,  482. 
Ryan,  John  D.,  377. 
Ryan,  Thomas  F.,  128,  134. 
Salt,   14,  304,  444.     See  also  National 

Salt  Co. 
Sanborn,  Judge,  254,  435. 
Schwab,  Charles,  205,  219,  222. 
Schwarzschild  and  Sulzberger,  11,  403. 
Scofield,  Shurmer  and  Teagle,  81. 
Seager,  H.  R.,  333. 
Seaver  Co.,  175. 
Security  holding  corporation,  27,  31,  37. 

See  also  Holding  company. 
Segal,  Adolph,  ioo-iot. 
Selling  costs,    149-150,    205,   249.    See 

also  Economies. 
Senate,  319-320,  326,  328-329,  331-332, 

338-340,  342-343,  352-354,  359,  361- 

362,  365-367,  369-370,  380-383,  385, 

470. 
Senff,  C.  H.,  93- 
S.  F.  Bowser  and  Co.,  492. 
Shears.     See  National  Shear  Co. 
Sheet  steel.     See  Steel. 
Shelby  Steel  Tube  Co.,  41-42,  189,  195, 

200,  203,  207,  287. 
Sherman  Act,  17,  23,  27,  loi,  168,  300, 

319-323,  326,  329-330,  332-333,  353, 

357.  362,  365,  367,  369.  375,  382,  387- 

445,  451,  466-467,  469,  487,  494-497, 

561. 
Sherman,  Senator,  319. 
Shiras,  Justice,  393,  395- 
Shoe,  3,  174- 

Shoe  machinery,  3,  164-185.     See  also 
United  Shoe  Machinery  Co. 


596 


INDEX 


Shoe  Manufacturers'  Alliance,  176,  179. 

512. 

Shoe    Manufacturers'    Association    of 

Brockton,  177. 
Silver,  377. 
Silver-ware.     See   International    Silver 

Co. 
Simmons-Underwood  Tariff    Act,    iii, 

221,224,  335,  371- 
Skou  Miss,  420. 

Skrainka  v.  Scharringhausen,  308-300. 
Slaughter  v.  Thacker  Coal  and  Coke  Co., 

307- 
Sloss-SheSield  Steel  and  Iron  Co.,  41, 

igo,  8 10. 
Smith,  Judge,  235,435- 
Smoking  tobacco.     See  Tobacco. 
Smyth  V.  Ames,  543,  55i- 
Snuff.     See  Tobacco. 
South  Improvement  Co.,  48-52. 
Southern  Wholesale   Grocers'   Associa- 
tion, 492. 
Spreckels,  Adolph  B.,  94. 
Spreckels,  Claus,  94. 
Spreckels,  John  D.,  94. 
Spreckels   Sugar   Refining   Co.,   93-95. 

102-103. 
Standard  Oil  Co.,  4, 19-21,  24-27, 31,  42, 

45-91,  151,  196,  211,  219-220,  261- 

262,  273,  278-279,  298,  314-315,  366, 

369,  375.  393,  406-413,  444-452,  494, 

505,  523.  526,  540,  547- 
Standard  Oil  Co.  v.  United  States,  300, 

329,  406-415,  418-419,  463. 
Standard   Oil   "trust".     See   Standard 

Oil  Co. 
Standard  Rope  and  Twine  Co.,  502. 
Standard  Sanitary  Manufacturing  Co., 

42,  424-426,  434,  444. 
Standard  Sanitary  Manufacturing  Co.  v. 

United  States,  424-426. 
Stanley  Committee,  222,  229. 
Stanley,  Representative,  332. 
Starch,  437.    See  also  National  Starch 

Co. 
State  legislation,  23,  30-31,  5i>  177-178, 

300,  358,  361,  564- 
State  v.  Nebraska  Distilling  Co.    See 

Nebraska. 
State  v.  Standard  Oil  Co.      See  Ohio. 
Steel,  3,  7, 9-13, 39, 41, 44. 186-230,  263- 

265.    See  also   United   States   Steel 

Corporation. 
Steel  hoops.    See  Steel. 
Steel  rails.    See  Steel. 


Stevens,  W.  S.,  53:^,  346. 

Steward,  Mr.,  512. 

Straus  V.  American  Publishers'  Associa- 
tion, 434. 

Substitutes,  278. 

Sugar  Refineries  Co.  See  American 
Sugar  Refining  Co. 

Sugar,  3,  21,  99-122,  317.  See  also 
American  Sugar  Refining  Co. 

Sulphur,  539. 

Sweden,  167,  224,  239. 

Swift  and  Co.,  10,  403,  486. 

Swift   and  Co.  v.  United  States,  403- 

405. 
Swift,  Louis  F.,  486. 

Taft,  William  Howard,   113,  329-33I1 

333-335,  444,  461. 
Tarbell,  Ida,  46. 
Tariff,  102,  111-113,  115,  122,  145,  153, 

167,  221,  239,  254,  273-274,  279,  325, 

333-335,  387,  523,  563- 
Taussig,  F.W.,  92,  112,  186,542. 
Temple  Iron  Co.,  426-428. 
Temple  Iron  Co.  v.  United  States,  426- 

429. 
Tennessee,  23. 
Tennessee  Coal,  Iron  and  Railroad  Co., 

187,  207,  209-210,  213,  215. 
Terminal   Railroad   Association   of   St. 

Louis,  423-424,  444. 
Texas,  23,  66. 
Texas  Co.,  448. 
Textile,  3. 

Thomas  Manufacturing  Co.,  246. 
Thomas,  W.  B.,  99. 
Thread,    13,   386.     See  also   American 

Thread  Co. 
Tide  Water  Pipe  Co.,  54-56,  72,  86. 
Tidewater  Oil  Co.,  449- 
Tin  can,  44.   See  also  American  Can  Co. 
Tin  plate.    See  Steel. 
Tobacco,  3,  13,  41,  44-45,  123-163.     See 

also  American  Tobacco  Co. 
Trade  associations,  i . 
Trade  Commission  Act,  337-357,  359- 

360,  362,  367,  378,  384.  386,  437,  447, 

451- 
Trade  meetuigs,  225,  438,  440. 
Trade  unions,    151-152,   326,   371-373. 

442-443. 
Trustee  device,  18-28,  56,  92,  105,  118, 

262,  311-31S,  317- 
Tubes.     See  Steel. 
Tying  clauses.    See  Tying  contracts. 


INDEX 


597 


Tying  contracts,  169,  171-172,  174-178, 
357,  360-363,  366,  370,  422,  434,  476. 

Underwriting  syndicate,  204,  283,  285, 
288. 

Unfair  competition,  65,  67,  77-83,  nS, 
219,  251-254,  277,  330,  340,  344,  350- 
355,  359,  362,  367,  371,  384,  467,  478- 
479,  491,  496-407,  540,  562-563. 

Union  Pacific  Railroad,  444. 

Union  Railroad  Co.,  191. 

Union  Steel  Co.,  209,  215. 

Union  Tobacco  Co.,  128. 

United  Cigar  Stores  Co.,  153,  4i4,  4i8, 
454,  457,  462,  468-469. 

United  Hatters  of  North  America,  405- 

United  Pipe  Lines,  53,  55- 

United  Shoe  Machinerj'  Co.,  4,  42,  164- 
i8s,  190,  267,  279,  298,  331,  361-362, 
378,  431-434,  444,  475-476,  505,  539- 

United  Shoe  Machinery  Corporation. 
See  United  Shoe  Machinery  Co. 

United  States  Cast-Iron  Pipe  and  Foun- 
dry Co.,  190. 

United  States  Cotton  Duck  Corporation, 

43- 
United  States  Envelope  Co.,  42. 
United  States  Leather  Co.,  40,  272,  298, 

539- 
United  States  Pipe  Line  Co.,  71- 
United  States  Sugar  Refining  Co.,  96. 
United  States  Rubber  Co.,  272,  502,  504- 
United  States  Steel  Corporation,  4,  6, 43, 
90,  186-230,  234,  265,  270,  279-280, 
285-289,  332,  375,  378,  386,  438-440, 
444,  490,  497,  502-503,  508,  510,  519, 
522,  524,  526-527,  539-540. 
United  States  v.  American  Tobacco  Co., 

329,  413-419,434,498. 
United  States  v.  Corn  Products  Refinmg 

Co.,  436-438. 
United  States  v.E.  C.  Knight  Co.,  323, 

388-391.  397,  404-  411,  442-443- 
United  States  v.  Greenhut,  441. 
United  States  v.  International  Harvester 

Co.,  435-436,  493- 
United  States  v.  Joint  Traffic  Associa- 
tion, 394-395,  41O-411,  413,  419,  443- 
United  States  v.  Patten,  429-431- 
United  States  v.  Patterson,  441- 
United  States  v.  Reading  Co.,  426-429- 
United  States  v.   St.   Louis  Terminal 

Association,  422-424. 
United  States  v.  Trans-Missouri  Freight 
Association,  39I-39S,  410-411,  4i3- 


United  States  v.  United  Shoe  Machinery 

Co.,  432-435,  438. 
United  States  v.  United  States    Steel 

Corporation,  438-440,  493. 
United  States  v.  Winslow,  431-432. 
Universal  Portland  Cement  Co.,  209. 
Untermyer,  Samuel,  461. 
Utah,  224. 
Utilization  of  by-products,  47,  63-64,  87, 

145,  198,  205,  506,  514-515- 

Vanderbilt,  W.H.,  61. 

Vegetable,  3. 

Vertical  combination,  3-4,  188,  196,  198- 

199,  204,  234-235,  502-503. 
Virginia  Iron,  Coal  and  Coke  Co.,  190. 
Vogt,  Paul  L.,  92. 

Wages,  554-555,  557- 
Walker,  Francis,  186. 

Wall  paper,  14.    See  also  National  Wall 
Paper  Co. 

Warder,  Bushnell  and  Glessner  Co.,  231- 
233,  238,  240,  294. 

Warner  Sugar  Refining  Co.,  100,  102. 

Washington,  79. 

Watch  case.    See  Keystone  Watch  Case 
Co. 

Watered  stock.    See  Overcapitalization. 

Waters  Pierce  Oil  Co.,  81. 

W.  A.  Wood  Mowing  and  Reaping  Ma- 
chine Co.,  246. 

Wayman,  Mr.,  425. 

W.  Duke,  Sons  and  Co.,  124. 

Webb-Pomerene    Act,    374-387,    S26- 
528. 

Webb,  Representative,  362,  380,  383. 

Weber  Wagon  Co.,  238. 

Wells-Whitehead  Tobacco  Co.,  139- 

West  Virginia,  31,  447- 

Western  Beet  Sugar  Co.,  102-103. 

Western  Newspaper  Union,  492. 

Western  Sugar  Refining  Co.,  94-95,  loOr 
103,  107. 

Westinghouse  Air  Brake  Co.,  535- 

Westinghouse  Co.,  15. 

Weyman-Bruton  Co.,  454,  456-457,  470- 

Wheeling  Steel  and  Iron  Co.,  219. 

Whelan,  Mr.,  152. 

Whisky,  21,  23,  41,  44,  3i7-     See  also 
Distilling  and  Cattle  Feeding  Co. 

White,  Justice,  393,  395,  398,  400,  422, 
431- 

Whitney,  W.  C,  134- 

Wholesalers,  14-16,  82,  97,  152-153,  ISS. 


598 


INDEX 


ISO,  i6i,  220,  42s,  4sg,  464,  466,  472- 

473,  500-501,  503-504,  525- 
Wholesalers'  associations,  7. 
Wickersham,    Attorney    General,    348, 

444. 
Widener,  P.  A.  B.,  128,134. 
Wilgus,  H.  L.,  186. 
Willoughby,  W.  F.,  186. 
Wilson  and  Co.,  486. 
Wilson   Tariff   Act,  322-323,  332,  357, 

369-370. 
Wilson,  Woodrow,  333,  335.  34i>  363, 

380-381,  445,  494- 
Winslow,  Mr.,  164,  i75- 


Wire.     See  Steel. 

Wisconsin  Steel  Co.,  483. 

W.  J.  McCahan  Sugar  Refining  Co.,  96, 

98,  107. 
Woolley,  Judge,  220,  439. 
Woolson  Spice  Co.,  97-98. 
Writing  paper.     See  American  Writing 

Paper  Co. 
Wyoming,  224. 

Young,  A.  A.,  333- 

Young  Co.,  J.  S.     See  J.  S.  Young  Co. 
Youngstown  Sheet  and  Tube  Co.,  219^ 
226. 


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